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Implied Contractual Terms Test

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A contract is a document containing terms that have been agreed by the parties and are intended to be legally binding.

These terms are called express terms. However, there are occasions when terms have not been included in the agreement and need to be implied. These implied terms are not written into the agreement nor expressly agreed between the parties but are implied into the agreement by the Court.

The Court in a recent 2022 case involving Force India Formula One Team Ltd reaffirmed the test for the inclusion of an implied term. In this case Force India went into voluntary liquidation during the term of their agreement with Stichd, who had exclusive rights for the production of the team’s uniform. Force India was sold to Racing Point UK Ltd. Stichd stated the sale breached an implied term of the contract in that Force India would continue to manage the team because without their management parts of the contract with Stichd could not be performed. It was held that there should be an implied term for Force India to continue to operate the team.

In order for a term to be implied, it must be:

1. Reasonable to the objective reader and necessary for the performance of the agreement (this is called business efficacy); or

2. Obvious that the term should have originally been expressly included in the agreement to enable the agreement to make commercial or practical sense.

The Court will decide whether the term satisfies one or both of the above by reference to the nature of the express terms of the contract. If the inclusion of an implied term would conflict with an express term of the agreement, then it cannot be included. The implied term must have been able to satisfy either test at the time the agreement was entered into; it does not matter whether the term satisfies either test at the present time.

Just because the continued performance of the agreement is reasonable, this is not enough on its own to satisfy the inclusion of an implied term. It must also be necessary for the performance of the agreement. What is reasonable is determined by the ‘objective’ reader, which means the expectations of the parties is not considered, instead it is what would be considered reasonable by an ordinary outsider reading the agreement.

For a term to be obvious, it must be so obvious that it should have been included that it goes without saying. Not only must it be obvious that a term needs to be implied but also what the term is to state exactly.

Wilson Browne Solicitors can provide advice at the initial stages of entering a contract to ensure the terms to be agreed upon cover everything you require. We can also provide advice when things go wrong with an existing agreement. Contact our Commercial Litigation team who will be able to assist you further.

Rachel Leatherland

Posted:

Rachel Leatherland

Trainee Solicitor

Rachel is a trainee solicitor currently working within the Commerical Litigation team based in our Kettering office.