Implied terms in Australian contracts: what a contract says without saying it

Most people treat a written contract as a complete record of the deal: if it is not in the document, it is not part of the agreement. That belief is understandable, and it is wrong often enough to cause real trouble. Contracts regularly contain obligations nobody wrote down. Some are added by legislation that the parties cannot switch off. Others are read in by a court because, without them, the deal simply would not work as both sides must have intended.

These are implied terms: obligations treated as part of a contract even though they do not appear in its words. They matter most when something goes wrong in a gap the drafting did not anticipate. Who must provide site access? How quickly must work be done when no date was set? Must goods be fit for a purpose the buyer mentioned in passing? Can one party exercise a contractual power however it likes? The answers often turn on what, if anything, is implied.

This article explains, in general terms, where implied terms come from in Australian law, the tests courts apply before implying a term, the statutory guarantees that operate regardless of what the contract says, and how a business can draft and manage its contracts so that it depends less on implication. It is general information, not legal advice. Whether a particular term is implied depends heavily on the facts and the contract, so take legal advice on any significant dispute.

Why implied terms exist at all

No contract can anticipate everything. Even carefully negotiated agreements leave gaps, and many business contracts are anything but carefully negotiated: a quote accepted by email, a purchase order with standard terms on the back, a handshake confirmed by a short letter. The law has to decide what happens when a dispute arises in one of those gaps.

It does this in two broad ways. First, it interprets the express words, reading them in context to work out what they mean. Second, where interpretation cannot answer the question, it may imply a term. Implication is not a licence for a court to rewrite a bargain it finds unfair. Australian courts have long said they will not imply a term merely because it would be reasonable or because the parties would have been better off with it. The threshold is deliberately high, because the starting point is that people who write a contract are presumed to have said what they meant.

That high threshold is the first practical lesson. If something matters to your business, write it down. Implied terms are a safety net, not a substitute for clear drafting.

Figure 1A safety net, not a substitute

Write it down

• Settles the point at the outset
• Says what the parties meant
• Applied as agreed

Hope a term is implied

• Arises only once there is a dispute
• Must clear a deliberately high threshold
• Argued over facts and reasonableness

The four main sources of implied terms

Implied terms come from four broad sources. They operate differently and are tested differently, so it helps to keep them apart.

Terms implied in fact: the business efficacy tests

A term implied in fact is tied to the particular contract and its circumstances. The court asks whether, given everything both parties knew, a further term must be part of their bargain.

In Australia the leading statement of the conditions comes from a 1977 Privy Council decision, BP Refinery (Westernport) Pty Ltd v Shire of Hastings, which the High Court endorsed in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982). For a term to be implied in a formal written contract, it must:

1. be reasonable and equitable;
2. be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
3. be so obvious that it goes without saying;
4. be capable of clear expression; and
5. not contradict any express term of the contract.

All five conditions must be satisfied, and in practice the second and third do most of the work. Business efficacy means the contract would not work commercially without the term, not merely that it would work better. The officious bystander idea captures the third condition: if someone had asked the parties at signing whether the term was part of their deal, both would have replied impatiently, “of course”.

Figure 2The five conditions for a term implied in fact

• Do: Reasonable and equitable
• Do: Necessary for business efficacyno term if the contract works without it
• Do: So obvious it goes without saying
• Do: Capable of clear expression
• Do: Consistent with the express terms

Two features of these tests deserve emphasis.

Necessity is not desirability. A party often argues that a term should be implied because it would be fair, or because the other side’s conduct seems unreasonable. That is not enough. The question is whether the contract fails to function without the term.

An express term usually wins. If the contract already deals with the subject, even in a way one party now regrets, a court will not imply a contradictory term. A clause stating that the price is fixed regardless of cost changes cannot be undone by an argument that a price adjustment was implied.

Where a contract is informal or only partly written, the law takes a somewhat more flexible approach. Australian courts have recognised that when the parties have not tried to set out their whole bargain in writing, the question becomes whether a term is necessary for the reasonable or effective operation of the contract in the circumstances. Informality therefore cuts both ways. It makes implication more available, but it also makes the outcome less predictable, because the court must first work out what the agreement actually was.

Terms implied by law

Some obligations are attached to whole classes of contract, regardless of what the particular parties intended. These terms implied by law reflect a judgement that a certain kind of relationship needs a standard default rule. Once a term has been recognised for a class of contract, it applies to every contract in that class unless excluded.

Examples that commonly affect business include:

• A duty to cooperate. Where one party’s performance depends on the other doing something, the law generally implies an obligation on the second party to do what is reasonably necessary to allow performance. A contractor cannot finish a fit-out if the owner never provides access, and a supplier cannot deliver to a specification the customer never issues.
• Work and materials contracts. In contracts to do work and supply materials, the law has traditionally implied that the work will be done with reasonable care and skill and that materials will be of good quality and reasonably fit for their purpose, unless the contract or circumstances show otherwise.
• Employment contracts. Employment carries implied obligations such as fidelity and the employee’s duty to obey lawful and reasonable directions. The High Court has rejected a general implied term of mutual trust and confidence in Australian employment contracts, which is a reminder that not every obligation argued for will be recognised.

Terms implied by law can usually be excluded or modified by clear express words, but statute may prevent that in some cases, and courts read exclusion clauses carefully.

Custom and trade usage

A term may also be implied from a custom or usage of a particular trade or market. The bar is high. The practice must generally be so well known and acted upon in that trade that people dealing in it would be taken to contract on that basis. It must be certain, reasonable and consistent with the express terms. Evidence that a practice is common, or that one party always does business a certain way, is usually not enough.

Custom arguments often appear in trades with long-standing conventions, such as how measurements are taken for payment, what an allowance customarily includes or how particular materials are graded. If your business relies on such a convention, it is far safer to write it into the quotation or contract than to hope a court will recognise it later.

Terms implied by statute

Legislation is the most powerful source of implied terms, because some statutory terms cannot be excluded.

The Australian Consumer Law (ACL) contains consumer guarantees that apply when goods or services are supplied to a “consumer”. The definition is wider than many businesses expect. Since 1 July 2021, a business can be a consumer when it acquires goods or services costing up to $100,000, or of a kind ordinarily acquired for personal, domestic or household use, subject to exceptions such as goods bought for resale or for use up in manufacturing. The guarantees include acceptable quality, fitness for any disclosed purpose, correspondence with description, and that services are rendered with due care and skill. They cannot be excluded by contract, although in some business-to-business situations the supplier’s liability may be limited in specified ways. The Australian Competition and Consumer Commission publishes guidance on how they work.

Sale of goods legislation in each state and territory implies conditions into contracts for the sale of goods, such as that goods correspond with their description and, in some circumstances, are of merchantable quality and fit for a purpose made known to the seller. Unlike consumer guarantees, these can often be excluded in commercial contracts, which is one reason standard business terms frequently contain exclusion clauses.

Industry-specific legislation also implies terms. Home building legislation in each state, for example, implies statutory warranties into residential building contracts covering matters such as workmanship, materials and compliance with the law. Employment terms are heavily shaped by the Fair Work Act 2009 and modern awards.

Separately, the unfair contract terms regime can make certain terms in standard form small business and consumer contracts void. That is not an implied term, but it operates alongside them and reinforces the point that the written document is not always the whole story.

Good faith: an unsettled question

Whether Australian commercial contracts contain an implied duty of good faith is one of the most discussed and least settled questions in contract law. Some courts, particularly in New South Wales, have implied an obligation to act reasonably or in good faith when exercising certain contractual powers, such as a power to terminate or to approve. The High Court has not resolved whether such a duty is implied generally, and different courts have taken different views.

For a business, the practical position is straightforward. Do not assume the other party must act in good faith unless the contract says so, and do not assume you are free to exercise every discretionary power in any way you like. Where discretion matters, such as approvals, variations or termination rights, it is better to state in the contract how the discretion is to be exercised, for example reasonably, promptly and for a stated purpose.

Entire agreement clauses do less than people think

Many contracts contain an entire agreement clause, stating that the document records the whole agreement and supersedes earlier negotiations. These clauses are useful. They reduce arguments that something said during negotiations formed part of the deal.

They do not automatically exclude implied terms. Whether they do depends on their wording and the circumstances, and courts tend to read them narrowly. They cannot exclude consumer guarantees under the ACL, and they do not stop a claim that pre-contract statements were misleading or deceptive under the ACL. If the intention is to exclude terms that would otherwise be implied, the contract needs to say so clearly, and even then statute may override it.

Figure 3What an entire agreement clause does and does not do

• Do: Reduces arguments about negotiation statementsthat they formed part of the deal
• Avoid: Automatically exclude implied termsdepends on wording and circumstances
• Avoid: Exclude consumer guarantees under the ACL
• Avoid: Stop claims of misleading or deceptive conduct

Gaps that commonly lead to arguments about implication

Most implied-term disputes arise from a small number of predictable gaps. Closing them in the drafting is far cheaper than arguing about them later.

A worked example

This is an illustrative example. The business, figures and events are hypothetical.

A small fabrication business agrees by email to supply and install steel balustrades for a commercial building at a fixed price of $48,000, with installation “in late March”. The email exchange says nothing about site access, scaffolding or who removes temporary barriers. When the installation crew arrives, the head contractor has not finished the slab edges and refuses access for three weeks. The fabricator’s crew sits idle and the business misses another job. It claims $9,500 for idle labour and remobilisation. The head contractor replies that the contract contains no promise about access and no delay clause, so nothing is owed.

How might implication apply? The contract is informal, so a court would look at whether an obligation was necessary for the contract’s reasonable or effective operation. Installation was impossible without access, which points towards an implied duty to cooperate by providing access within a reasonable time. Whether that duty was breached depends on what was reasonable in the circumstances, including what the fabricator knew about the program when it agreed to “late March”. Even if a breach is established, the fabricator must still prove its loss and show it took reasonable steps to reduce it.

The fabricator may well have a claim, but it now depends on contested facts, a judgement about reasonableness and the cost of pursuing a modest sum. Compare that with one sentence in the original quotation: “Price assumes clear and continuous access to completed slab edges from 20 March; standing time and remobilisation will be charged at the rates below if access is not available.” The second approach costs nothing and turns an argument about implication into a straightforward application of agreed terms.

Figure 4The balustrade access dispute, two ways

	Relying on implication	One sentence in the quote
The obligation	An implied duty to cooperate, if a court finds it	Clear and continuous access from 20 March
What decides it	Contested facts and reasonableness	The agreed terms
Standing time	Loss must be proved and mitigated	Charged at the stated rates
Cost	Pursuing a modest sum through a dispute	Nothing extra

How this applies to a small Australian business

Small businesses rely on informal contracts more than most, which makes them more exposed to the uncertainties of implication. A few habits make a large difference:

• Use a short set of standard terms with every quotation and order, written in plain language, covering scope, price, timing, access and information you depend on, acceptance, payment, variations and limits of liability.
• State your assumptions. A quotation that lists its assumptions (access dates, information to be supplied, ground conditions, quantities) converts likely gaps into express terms.
• Know when you are supplying a consumer. If a customer could be a consumer under the ACL, including another business buying below the threshold, the guarantees apply and cannot be contracted out. Make sure your terms, warranties and complaint handling are consistent with them.
• Be careful with purpose. If a customer tells you what goods or work are for, statutory fitness-for-purpose obligations may follow. Either confirm you can meet that purpose or state clearly what you are and are not warranting.
• Read the other side’s terms. Their standard terms may imply, exclude or limit far more than you expect. The how contracts are formed and what they contain article explains how terms become part of a contract in the first place.

Common mistakes

• Assuming silence means freedom. If the contract says nothing about cooperation, timing or quality, the law may fill the gap with an obligation you did not intend.
• Relying on implication instead of drafting. Implied terms are hard to prove and the outcome is uncertain. Arguing that a term “must” have been implied is often a sign the contract should have said it.
• Arguing fairness instead of necessity. Courts imply terms in fact only when they are necessary, not because they would be fairer.
• Over-trusting an entire agreement clause. It will not exclude non-excludable statutory guarantees or liability for misleading conduct, and may not exclude other implied terms.
• Copying exclusion clauses without checking the law. A clause that purports to exclude consumer guarantees can itself create problems under the ACL.
• Forgetting the other direction. Implied duties to cooperate and to act within a reasonable time can bind your business as well as the other party.

Questions to ask

• What would happen if a dispute arose about something this contract does not mention?
• Have we stated the assumptions our price and timing depend on?
• Are the inputs we need from the other party (access, information, approvals) written down with timeframes?
• Could the customer be a consumer under the Australian Consumer Law, and are our terms consistent with the consumer guarantees?
• Has the customer told us what the goods or work are for, and are we prepared to warrant that purpose?
• Does any party have a discretion (approval, termination, variation) that should be limited by an express standard?
• If we use an entire agreement clause, do we understand what it does and does not exclude?

Bringing it together

A contract is more than its words. The law may imply terms to make a particular deal work, attach standard obligations to whole classes of contract, import established trade practice and, most powerfully, insert statutory guarantees that cannot be excluded. Courts set a high bar before implying a term in fact, requiring necessity rather than fairness, and an express term on the same subject will usually prevail. Good faith remains unsettled in Australian commercial contracts, and entire agreement clauses do less than many people assume.

The practical response is not to become an expert in implication. It is to reduce the business’s dependence on it: write down the scope, price, timing, inputs, quality and assumptions that matter, limit discretions with express standards, and understand when consumer guarantees apply. For the wider discipline of separating what the contract says from what people believe it says, the thinking clearly about a contract problem article offers a structured approach. When a gap does become a dispute, take legal advice early, because the strength of an implied-term argument depends on facts that are easier to gather while they are fresh.

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Source: KEVOS editorial notes. Examples and figures in this article are illustrations. This article provides general information and does not constitute legal advice.