Contract - Contractual Terms - Implied Terms - Terms Implied in Fact

Terms Implied in Fact

Terms may be implied due to the facts of the proceedings by which the contract was formed. In the Australian case of BP Refinery Westernport v. Shire of Hastings the UK Privy Council proposed a five stage test to determine situations where the facts of a case may imply terms (this only applies to formal contracts in Australia). However, the English Court of Appeal sounded a note of caution with regard to the BP case in Philips Electronique Grand Public SA v. British Sky Broadcasting Ltd in which the Master of the Rolls described the test as "almost misleading" in its simplicity. The classic tests have been the "business efficacy test" and the "officious bystander test". The first of these was proposed by Lord Justice Bowen in The Moorcock. This test requires that a term can only be implied if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties cannot as reasonable businessmen have intended. But only the most limited term should then be implied - the bare minimum to achieve this goal. The officious bystander test derives its name from the judgment of Lord Justice Mackinnon in Shirlaw v. Southern Foundries (1926) Ltd but the test actually originates in the judgment of Lord Justice Scrutton in Reigate v. Union Manufacturing Co (Ramsbottom) Ltd This test is that a term can only be implied in fact if it is such a term that had an "officious bystander" listening to the contract negotiations suggested that they should include this term the parties would "dismiss him with a common 'Oh of course!'". It is at least questionable whether this is truly a separate test or just a description of how one might go about arriving at a decision on the basis of the business efficacy test.

Some jurisdictions, notably Australia, Israel and India, imply a term of good faith into contracts. A final way in which terms may be implied due to fact is through a previous course of dealing or common trade practice. The Uniform Commercial Code of the United States also imposes an implied covenant of good faith and fair dealing in performance and enforcement of contracts covered by the Code, which cannot be derogated from.

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