When entering into a contract, it is important to clearly outline the terms and conditions. However, not all terms may be expressly stated in the contract. These are referred to as implied terms.
Implied terms are terms that are not explicitly stated in the contract but are necessary to give the contract business efficacy, which essentially means they are necessary to make the contract work in a commercially reasonable manner.
Here are some methods used to determine what the implied terms of a contract are:
1. Business Efficacy
One of the main methods used to determine what the implied terms of a contract are is the business efficacy test. This method aims to identify any terms that are necessary to make the contract function but were not expressly stated in the contract.
The test examines the commercial purpose of the contract and the circumstances surrounding the agreement, including the parties’ intentions and the context in which the contract was formed.
2. Officious Bystander Test
Another method used to determine implied terms is the officious bystander test. This test involves imagining a hypothetical bystander overhearing the conversations between the parties before the contract was made.
If that bystander would have understood that a particular term was a non-negotiable aspect of the contract, then that term may be considered an implied term.
3. Custom and Practice
Custom and practice within an industry or trade can also help determine implied terms. Parties to a contract are expected to be aware of established practices within their industry, and these practices can influence what terms are implied in the contract.
For example, in the construction industry, it is common practice to work to a certain standard of care and diligence, even if it is not explicitly stated in the contract.
4. Previous Dealings
Previous dealings between the parties can also provide guidance on what terms are implied in the contract. If the parties have a history of dealing with each other, the terms implied in previous contracts may also be implied in the current contract.
5. Statutory Provisions
Finally, statutory provisions can also establish implied terms in contracts. It is essential to examine any relevant legislation when interpreting a contract, as the statute may imply certain terms, even if the parties did not explicitly state them.
In conclusion, there are various methods used to determine the implied terms of a contract, including business efficacy, the officious bystander test, custom and practice, previous dealings, and statutory provisions. It is crucial to consider these methods when entering into a contract to ensure that all necessary terms are included, regardless of whether they are explicitly stated.