Implied terms in contracts and promises a court can add to your agreement

An implied term is a promise that becomes part of your contract even though nobody wrote it down or said it out loud. Courts and statutes add these terms to agreements all the time, and once they are there they bind the parties exactly as if they had been negotiated. For a small business, the surprise is usually the problem: you often discover an implied term only when the other side, or a court, relies on it against you.

This article explains what implied terms are and the three ways they can arise: terms implied in fact from the parties' circumstances, terms implied by law as standard incidents of a particular type of contract, and terms implied by custom or usage in a trade or industry. It then works through a realistic example, clears up the common misunderstandings, and explains when a contract lawyer can help.

What is an implied term?

Most of a contract's promises are express terms: the written clauses, or the spoken words of an oral agreement. An implied term is different. It is a promise the parties did not actually agree to, but that is treated as part of the contract because the law says it should be.

The reason implied terms exist is that parties rarely turn their minds to every eventuality when they make a bargain. Implication fills those gaps. But it is a narrow power, not a licence to rewrite the deal. As the High Court explained in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, the courts are slow to imply a term, and it is not enough that a term would be reasonable: it must be necessary. The more detailed and comprehensive a contract is, the less room there is for implication, because the more likely it is that the parties dealt with the point, or deliberately left it out.

There are three distinct routes by which a term can be implied, and the route matters because each has its own test and its own kind of evidence.

Terms implied in fact: what the parties must have intended

Terms implied in fact are specific to the individual contract. They are drawn from what the parties themselves must have intended, judged objectively from the terms of the agreement and the surrounding circumstances, including how the parties have dealt with each other in the past. A consistent course of dealing between the same parties can support an implied term: if a supplier has invoiced and been paid on 14-day terms for years, a court may treat those terms as part of each new contract even if no document says so.

The classic test comes from BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, approved and applied by the High Court in Codelfa. A term will only be implied in fact if all five conditions are met:

Reasonable and equitable: the term must be fair to both sides, not one that quietly loads a benefit onto one party.
Necessary for business efficacy: without the term, the contract would not work properly in a commercial sense.
Obvious that it goes without saying: both parties would have assumed the term without debating it.
Capable of clear expression: the term can be stated precisely enough to be enforced.
Consistent with the express terms: the implied term must not contradict anything the parties actually wrote or said.

The third condition is often called the officious bystander test, from Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, which the High Court quoted with approval in Codelfa. Imagine that, while the parties are shaking hands on the deal, a meddlesome bystander interrupts: "What about that point?" If both parties would have brushed the question aside with "of course, that goes without saying", the term may be implied. If either party would have hesitated, the implication fails.

The key discipline is necessity. A court will not imply a term just because it would have made the deal fairer or more convenient. In Codelfa the High Court stressed that it is not sufficient that a term would be reasonable to imply: it must be clearly necessary to give the contract business efficacy.

Terms implied by law: standard incidents of a type of contract

Terms implied by law work differently. They are not derived from what these particular parties intended. They attach to every contract of a particular class, because the law treats them as necessary incidents of that kind of relationship. The High Court drew the distinction in Byrne v Australian Airlines Ltd (1995) 185 CLR 410: terms implied in fact give effect to the parties' presumed intention, while terms implied by law are settled incidents of a class of contract, applied for broader reasons of policy.

Recognised examples of terms implied by law include:

Duty to cooperate: each party must do everything reasonably necessary to enable the other party to have the benefit of the contract.
Reasonable time: where no time for performance is fixed, the parties must perform within a reasonable time, judged by the circumstances.
Quiet enjoyment: a landlord impliedly promises that the tenant will have quiet enjoyment of the premises without interference.

Employment contracts show how careful the courts are about implying terms by law. In Commonwealth Bank of Australia v Barker (2014) 253 CLR 169, the High Court unanimously refused to imply a term of mutual trust and confidence into Australian employment contracts. The Court's reasoning turned on the requirement that a term implied by law must be a necessary and established incident of the whole class of contract, and that the mutual trust and confidence term failed that test. The case is a useful reminder that a term cannot be implied by law simply because it would be desirable.

There is also a statutory layer. Where a business supplies goods or services to a consumer, the old implied terms about quality and fitness have largely been replaced by guarantees in the Competition and Consumer Act 2010 (Cth) sch 2 (Australian Consumer Law). The Act guarantees that goods are of acceptable quality (s 54), that they are reasonably fit for any disclosed purpose (s 55), and that services are reasonably fit for the purpose the consumer made known (s 61). These guarantees apply automatically to a supply to a consumer, and a clause saying "no warranties" will not remove them in a consumer sale.

Terms implied by custom or usage

A third route is custom. A term can be implied because it reflects a well-established practice in a trade or industry that everyone in that business takes for granted. The High Court set out the requirements in Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226. Whether a custom exists is a question of fact, and the party relying on it must prove that the custom is so well known and acquiesced in that everyone in the situation would reasonably presume it formed part of the agreement. As with terms implied in fact, a custom cannot contradict the express terms of the contract.

Evidence is what separates a custom from a habit. One business's usual way of doing things is not a custom. To succeed, the party arguing for the term generally needs to show a settled and notorious practice across the trade or industry, not just in its own dealings.

How implied terms play out: a worked example

Sofia owns a cafe and engages a builder to fit out new premises. The written contract sets out the scope of work and the price, but says nothing about when the work must be finished. Sofia told the builder she needed to open within eight weeks, and she is paying rent on the premises from the day the lease starts. The builder works slowly and the fit-out takes six months.

If Sofia terminates the contract and sues for damages, a court is likely to imply a term that the fit-out must be completed within a reasonable time. That is a term implied by law: it attaches to this kind of contract regardless of what the parties wrote. What counts as a reasonable time will be assessed against the circumstances, including the size of the job, the norms for that kind of fit-out, what the builder knew about Sofia's need to open, and the rent she was carrying.

Sofia might also argue a term implied in fact from the course of dealing, if the same builder had done two earlier fit-outs for her and had always finished within the window he promised. But under the BP Refinery test she would have to show the term was necessary for the contract to work and was so obvious it went without saying, not merely that it would have been convenient. If the contract still functioned commercially without a fixed date, the implication in fact would fail, and she would be left with the reasonable-time term implied by law. That is why implication arguments are often finely balanced: the difference between winning and losing can come down to whether the court treats the term as necessary or merely helpful.

Common misconceptions about implied terms

A few misunderstandings come up often enough to deserve direct answers:

"If it is not in writing, it is not part of the contract": Not true. Implied terms bind even though they were never written or spoken, and consumer guarantees apply to a sale regardless of what the paperwork says.
"A court will fill every gap with whatever seems fair": Wrong. Implication requires necessity, not reasonableness. A court will leave a gap alone if the contract can still operate without a term being added.
"Australian contracts carry an implied duty of mutual trust and confidence, or of good faith": No. The High Court rejected mutual trust and confidence in employment contracts in Barker, and Australia has not adopted a general implied duty of good faith in all contracts. Some duties of cooperation and honesty exist in specific contexts, but a business should never assume an open-ended fair dealing term will be implied.
"An implied term can override what the contract actually says": No. Every route to implication requires consistency with the express terms. If the parties dealt with the point in writing, that written term wins.

When you need a contract lawyer

Implied terms rarely matter until a dispute starts, and by then the arguments are expensive. A lawyer's practical value comes earlier, at the drafting and review stage:

Finding the gaps: a lawyer reviews a contract before you sign and identifies every silence a court would have to fill, such as completion dates, payment timing, delivery obligations, and who bears which risk.
Writing the terms: an express term displaces an implied one. If the contract deals with a point expressly, there is no room for a court to imply something different.
Assessing the routes: if a dispute has already started, a lawyer advises whether a term can be implied at all, on which of the three routes, and what evidence is needed to prove it: a course of dealing, a recognised category of implied-in-law term, or a trade custom.
Pleading the case: a party relying on an implied term usually has to plead it specifically and prove the necessary facts. Getting that wrong can sink the claim before it is heard.
Checking consumer exposure: where your business sells to consumers, a lawyer can confirm which Australian Consumer Law guarantees apply and why exclusion clauses will not remove them.

A short review of a commercial contract is inexpensive compared with litigating what a contract "really meant" after a falling out.

Before you sign, ask what your contract doesn't say

The question this article should leave you with is simple: if your contract went to a court tomorrow, which terms would the court have to write in to make it work? A court will only imply a term when necessity demands it, and it will test the term against the five BP Refinery conditions, the recognised categories of implied-in-law terms, or the requirements for a trade custom. The practical answer is to make the gaps explicit before you sign.

Every silence in a contract is a term waiting to be written by someone else. If you do not write it, a court, a statute, or an industry custom will, and you may not like the version they choose. Read your next contract for what it does not say, and close the gaps while you still control the words.