LLB170 Lecture 3: Week 3 – Common Law and Statutory Implied Terms
Week 3 – Common Law and Statutory Implied Terms
Common Law
When will terms be implied?
The common law recognizes three main classes of terms which may be implied to fill the
gaps in contracts that are missing terms:
1. Terms implied in law
2. Terms implied by custom
3. Terms implied in fact
Possible fourth category: “universal terms” – represented by a duty of good faith
Excluding implied terms
Terms wont be implied in law, fact or custom where they are expressly excluded by the
parties or are inconsistent with the express terms of the contract
Not always excluded by an entire agreement clause
Terms implied in fact
Nature
• Usually said to be “presumed” intentions of the parties and are unique to the
contract in question
• Lord Hoffman: “implication of the term is not an addition to the instrument. It only
spells out what the contract means”
• Sometimes called ‘tacit terms’ - based on parties’ ‘latent unexpressed intention’
(Byrne) to fill a gap ‘lacuna’ in contract that appears during performance
Formal contracts
The BP Refinery tests
• Court is slow to imply terms into formal (written) contracts
• When ascertaining the parties presumed intentions and identifying an appropriate
term implied, reliance is placed on the Privy Council’s statement in BP Refinery
Westernport) Pty Ltd v Hastings Shire Council:
“for a term to be implied, the following conditions must be satisfied:
1. It must be reasonable and equitable
2. It must be necessary to give business efficacy to the contract so that no term will
be implied if the contract is effective without it
3. It must be so obvious that “it goes without saying”
4. It must be capable of clear expression
5. It must not contradict any express term of the contract
• Tests have been approved by the High Court on numerous occasions
Reasonable and equitable
• A term that imposes significant detriment/burden on another party isn’t likely to be
reasonable and equitable
Business efficacy
• A term must be necessary to give business efficacy to contract
• Prompting an inquiry into whether the proposed term is necessary to enable a
contract to operate in a businesslike manner
• “Needed in order to make the agreement work”, “to avoid an unworkable situation”
- Full Court of the Supreme Court of WA in Sekisui Rib Loc Australia v Rocla
See The Moorcock (principles pg 340); Re Ronim Pty Ltd (principles pg 341)
Obviousness
• “Prima facie that which in any contract is left to be implied and need not be
expressed is something so obvious that it goes without saying”
- Mackinnon LJ in Shirlaw v Southern Foundries (1962)
BP Refinery Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
Facts
Concerned an agreement made between the Shire of Hastings (the Shire) in the State of Victoria and BP Refinery
(Westernport) Pty Ltd (the Company), a member of a group of oil companies (BP Group), in relation to a site
within the Shire upon which BP Group was to construct an oil refinery
Under the agreement, the Company was to have a preferential status with respect to rates charged for the use of
the land. Some time later, the Company yielded occupation of the site to a co-subsidiary that also sought the
benefit of the agreement. The Shire levied the general rate on the new occupier, contending the rating
agreement only operated while the Company was in occupation.
Held
The majority of the Privy Council rejected the Shire’s contention and held that the rating agreement contained an
implied term allowing the right to preferential rates to be assigned to other members of the BP Group – the
Shires proposed term wasn’t reasonable or equitable
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
Facts
The parties contracted on the assumption that construction work could proceed on the basis of three shifts per
day. Because of noise, dirt and disruptions, local residents obtained an injunction preventing work on being
carried out on Sundays or between the hours of 10pm and 6am. This increased Codelfa’s cost. The SRA refused to
pay these costs on the ground they weren’t provided for in the contract.
Held
Codelfa sought to imply a term providing for compensation, but its claim was denied by the High Court on the
basis that “the parties made a common assumption which masked the need to explore what provision should be
made to cover the event which occurred… negotiation about the matter might have yielded any one number of
alternative provisions, each being regarded as a reasonable solution” – Mason J
Not a case of an obvious provision
For a case where the term WAS obvious, see Gwam Investments Pty Ltd v Outback Health Screenings Pty Ltd
(principles pg 342)
Clarity
• A term must not only be obvious but also be capable of being expressed in a clear
and precise manner
Consistency
• An implied term cannot be inconsistent with express terms
Why strict tests? (principles pg 343)
• Recognizes that parties take more for granted in conversation than in legal
documents
Informal contracts
• Oral or part oral/part written
• Where the contract is not spelled out in full
• Principles are less stringent than in BP Refinery
• Steps:
1. Identify the actual terms of the contract
2. Consider the possibility of implied terms. The court will imply a term where it is:
(a) Necessary for the reasonable or effective operation of the contract’ (Byrne
(Brennan, Dawson, Toohey, McHugh, Gummow JJ)); and
(b) need to also show the term is ‘so obvious it goes without saying’ (Byrne
(McHugh & Gummow JJ))
• High Court has suggested a flexible approach and approved the statement of Deane J
in Hawkins v Clayton: “in a case where it is apparent the parties have not attempted
to spell out the full terms of the contract, the court should imply a term by reference
to the imputed intention of the parties if… it can be seen that the implication of the
particular term is necessary for the operation of a contract”
• Identifies reasonableness as sufficient grounds for implying a term in an informal
contract
Bryne v Australian Airlines; Frew v Australian Airlines (1995) 185 CLR 410
Facts
The plaintiffs (Bryne and Frew) were employees of the defendant (Australian Airlines) and were fired for
pilfering (stealing things of little value)
The plaintiffs sued the defendant to recover damaged for breach of statutory duty (clause 11(a)) which
specified that a termination of employment should not be harsh or unjust or unreasonable
Held
The test of necessity was used – a term can only be implied if its omission would entail that rights of the parties
under the contract were significantly diminished. It was held there was no necessity here so therefore no
implied term
Document Summary
Week 3 common law and statutory implied terms. The common law recognizes three main classes of terms which may be implied to fill the gaps in contracts that are missing terms: terms implied in law, terms implied by custom, terms implied in fact. Possible fourth category: universal terms represented by a duty of good faith. Terms wont be implied in law, fact or custom where they are expressly excluded by the parties or are inconsistent with the express terms of the contract. Not always excluded by an entire agreement clause. Nature: usually said to be presumed intentions of the parties and are unique to the contract in question, lord hoffman: implication of the term is not an addition to the instrument. It only spells out what the contract means : sometimes called tacit terms" - based on parties" latent unexpressed intention" (byrne) to fill a gap lacuna" in contract that appears during performance.
