Implied Contract Terms: Definition and How Terms Are Set

What Are Implied Contract Terms?

Implied contract terms are items that a court will assume are intended to be included in a contract, even though they are not expressly stated. Implied terms occur because all contracts are necessarily incomplete in a world where uncertainty exists and because contracting parties face a trade-off between the costs and expected payoffs of writing more complete contracts.

Relying on implied contract terms is one way of economizing on the transaction costs of contracting, so that parties can focus their time and attention on completing other areas of a contract. Alternatively, in some cases, parties may agree to explicit contract terms that override implied terms if the benefit of doing so outweighs the associated contracting costs.

Understanding Implied Contract Terms

When negotiating contracts, parties choose not just the content of the terms of the contract, but also the degree of completeness of the contract—or how many specific terms and conditions will the contract define and cover in detail. All contracts are incomplete. No contract can cover every possible unknown future circumstance that might be relevant to the execution of the contract, but contracts can be more or less complete.

Businesses and professionals sometimes do not want to rely upon a court's interpretation of implied terms and prefer more complete contracts. Their contracts will often be very extensive, so that as many material items as possible are included in the contract. When it is not possible to cover every possible detail, a lawyer may appeal that such terms were implied to give force to the intent of the contract.

More complete contracts spell out in greater detail what each party is entitled to or bound to do. They take more time and effort to negotiate and write but they may prevent some disputes down the road by addressing issues that might arise in the contract at outset.

This means that contracting parties face a trade-off between writing more complete contracts, with higher transaction costs directly associated with negotiating and writing the contract, or less complete contracts, with lower upfront transactions costs but the risk of higher transaction costs later if a dispute arises over something not specified in the contract.

Benefits of Implied Contract Terms

Reliance on implied contract terms is one way to economize on these types of transaction costs. Implied contract terms allow the parties to skip over negotiating or writing certain terms in their contracts because they are legally assumed implicitly when the contract is entered into. This relieves the contracting parties of both the immediate cost of contracting over these terms and the fear that in the future a dispute will arise over them if they are not made explicit in the contract.

This benefits both parties in that it allows them to instead focus their attention on other aspects of the contract or to reduce the overall transaction cost of the contract. In turn, this benefits society as a whole because reducing transaction costs allows a greater number of economically efficient transactions to occur, which might otherwise be forgone if the transaction costs were higher.

How Implied Contract Terms Arise

Implied contract terms are by definition not explicitly agreed to by the contracting parties when they enter into a contract. So how do they get incorporated into a contract? Contract terms can be implied in a number of ways. Customary business practice, common law precedent, and statutory law can all form the basis of implied contract terms.

For example, in many transactions involving the purchase of goods or services, there is an implied warranty of merchantability in the common law. It is implied that what you are buying will serve the purpose that would be reasonably expected. This contract term is implied even when there is no written or oral contract. The buyer of a product assumes it will be free of general defects upon purchase. If the seller is aware of a frequent mechanical issue with that product, implied contract terms would compel them to make those issues known.

Even stating express terms to the contrary may not be sufficient to negate certain terms implied by the law; some implied conditions fixed in common or statutory law are specifically intended to prevent certain types of contracts or terms. For example, chattel slavery contracts or suicide pacts are illegal by statute or common law in many jurisdictions, and private contracts that include such provisions are considered null and void, notwithstanding the agreement of the parties to any such express contract terms.

In other cases, contract terms may be implied where the intent of a contract obviously necessitates the inclusion of certain items. For example, one of the intents of implied contract terms is to prevent instances of fraud by omission. It is a form of fraud if one of the parties in a contract attempts to renege on or alter their responsibilities by not revealing relevant information. This could include failing to reveal a conflicting interest in a contract with another party. A contract might not explicitly state that such information be made apparent. The implied contract terms might support the necessity to share information.

Contracts between individuals can include implied terms based on the precedents set by their actions or by the customary and accepted practice in their line of business. If a neighbor agrees to pay another neighbor for the regular shoveling of snow in winter, the implied contract terms mean they will pay each time their driveway and walkway are cleared. An incident may occur where the neighbor decides to withhold payment after a recent shoveling. They could still be held responsible for making that payment because of the prior arrangement. Even though there is no written contract to enforce these terms, there is an expectation of payment.