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Implied Terms in Contracts: Understanding Unwritten Obligations

by | May 2, 2024

As an entrepreneur or company owner, you will often need to negotiate contracts to do business with other parties. Such documents will be filled with express terms that describe the duties and obligations of your company and the parties that you will engage with. There will also be implied contract terms. These are terms that are assumed to be included in the contract but that are not expressly stated in it.

Implied contract obligations are a necessary part of negotiating contracts. It is not possible for anyone to foresee every possible event in an ongoing business relationship, which makes it impossible to establish a rule for every contingency in commercial agreements. Relying on that part of contract law that deals with implied terms will help you reduce your legal expenses related to drafting and reviewing commercial contracts. It will allow you and your prospective business partners to focus on the more significant areas of business contracts.

Types of Implied Terms

A contract term is implied when it is not explicitly included in the document but is automatically assumed because of common law, statute, widely accepted practice or custom, or the intention of the contracting parties. The last of these is especially applicable if you have had previous contracts or dealings with the parties you are negotiating your present contract with.

You should think of implied contract terms as unarticulated default terms that have been silently written in the business contract. In all commercial transactions, there is an understanding that the parties will execute the contract in good faith. This means that each party will abide by certain health and safety obligations and ensure the quality of the goods and services delivered.

Implied contract terms also come into effect when you have been working with the same parties on the same terms for years.

Criteria for Implying Terms

For a contract term to be recognized as implied, it must meet certain criteria. First and foremost, the obligations required by the term must be consistent with a widespread trade custom. To satisfy this requirement, there must be evidence showing that every business in your industry or market adheres to the implied term. Second, you must be able to produce solid evidence that every business in your industry or market operates according to the implied term.

Interpretation of Ambiguous Contracts

Contracts serve their purpose by providing clarity and ensuring substantial certainty. Even if you make it a point of pride and principle to do business in a fair and honest way, it is best to secure the protections of a business contract. While you may be honest, others may not be. An ambiguous contract from a prospective commercial partner is a sign that they may have no desire to be honest and transparent.

If you are in business, it is better to negotiate contracts with other parties you need to deal with; and it is best to turn such matters over to experienced business attorneys. However, if some pressing circumstance compelled you to accept an ambiguous contract you now realize is unfair, you can still contest it.

In cases involving an ambiguous contract, courts tend to side against the party who drafted it. When interpreting an ambiguous contract, it may be possible to review the background of circumstances surrounding the contract to eliminate the ambiguity. If this is not possible, then the court will side with you if the court deems the contract to be grossly unfair to your interests.

Because of this well-known tendency of the courts, such matters do not usually get to the litigation stage. You can usually settle an ambiguous contract dispute out-of-court.

Limits on Implied Terms

There are limits on implied terms. In addition to the criteria discussed above, it is important to note that implied contract obligations cannot be assumed if they go against the explicit terms of the contract or would in any way undermine the effective execution of the contract.

For example, if you know that you have health issues that will prevent you from carrying out certain obligations of a contract, you cannot claim that the implied terms of the contract allow you a way out of it. This would constitute signing the contract in bad faith.

Role of Courts in Determining Implied Terms

Courts use two tests to determine implied contract terms: business efficacy and the officious bystander.

In the first test, the court assesses whether the implied term is essential in making the contract operational.

The officious bystander test requires a little more imagination but is still guided by common sense. It involves the following scenario. If while the parties were negotiating the terms of the contract, an officious bystander suggested a particular provision be added to it, would the parties respond: “Of course it should be added”? If the court determines that there would be such a response, then the court will affirm the existence of an implied contract term.

Getting the Legal Help You Need

Interpreting implied contract terms is a matter that can usually be dealt with out-of-court. However, if you need to engage in business litigation, it is best to have a team of lawyers with extensive experience in the area. If your company is based in the state of Florida, the Campbell Law Group can provide you with seasoned commercial litigation representation.

Contact us today for more information on how we can assist your business.

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