Implying Terms Into Contracts

21st Oct 2016

Often when a dispute arises involving a contract, the parties will take their first really good look at its terms and to their horror, realise that it may not contain all that they wanted. They may then try to argue there are “implied terms”. However, this may not always be successful.

The test for implication of terms into contracts is generally accepted to be as follows:

  1. the implication 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.

In Upintheair Pty Ltd v Business Custodians Ltd [2016] NSWCA 287, the purchaser sued the vendor of a business for damages for misleading and deceptive conduct and breach of contract, and the vendor counterclaimed for interest at 20% on monies payable under a vendor finance provision.

In this instance, there was a formal and detailed business sale agreement. One of the terms was that the vendor was to receive interest at the rate of 20% on a sum of $100,000 for 90 days after settlement. The contract was silent on what interest was payable thereafter if the sum was not paid in 90 days.

The court found that there was indeed misleading and deceptive conduct based upon false business records, and that the purchaser had relied upon those false representations in entering into the contract.

In respect of the vendor’s claim that there should be a term implied for the continuation of interest at 20% beyond the payment period of 90 days following settlement, the court was split.

Two judges found that the implication of a term that the purchaser pay further interest was neither necessary to give business efficacy to the contract nor so obvious that ‘it goes without saying’.

Without the term, the relevant contractual provisions were in no sense unworkable. Their silence as to what happens thereafter did not hinder the operation of the express terms.

The relevant express contractual provisions were here contained in a formal contract which was complete on its face. They were not in an informal contract, to which a less rigid approach may be appropriate.

The court found that the implication of a term that the purchaser pay further interest at the rate of 20% after the 90 days for payment of the vendor finance sum was neither necessary to give business efficacy to the contract nor so obvious that ‘it goes without saying’. Without the term, the relevant contractual provisions are in no sense unworkable. They provided for interest to be paid in respect of the specified 90 day period. Their silence as to what happens thereafter did not hinder the operation of the express terms.

MICHAEL SING
SPECIAL COUNSEL

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