Contents of a contract - Terms implied by common law and sta...

Learning Outcomes

This article outlines when and how terms are implied into contracts under English law, including:

• Distinction between terms implied in fact and terms implied in law, and why the courts treat them differently.
• The business efficacy and officious bystander tests, with emphasis on necessity rather than mere reasonableness.
• The modern sequential approach to construction and implication (interpretation before implication) and its application in leading cases such as Marks and Spencer v BNP Paribas.
• The BP Refinery conditions for implication in fact and how they operate as a practical checklist in problem questions.
• Implication by custom (certainty, notoriety, reasonableness, consistency with express terms) and how to analyse evidence of trade usage in exam scenarios.
• Statutory implied terms under the Sale of Goods Act 1979, the Supply of Goods and Services Act 1982, and the Consumer Rights Act 2015, including their status as conditions, warranties, or innominate terms.
• Classification of implied terms and the resulting impact on available remedies, termination rights, and damages.
• The effect of s 15A SGA 1979 in B2B sales, together with the control of exclusion clauses under UCTA 1977 and the non-excludability of core CRA 2015 rights.
• Structured techniques for answering SQE1-style MCQs on implied terms, focusing on identifying the source of implication, the correct test, and the likely remedy.

SQE1 Syllabus

For SQE1, you are required to understand how and why terms may be implied into contracts, both by the courts and by statute, with a focus on the following syllabus points:

• the distinction between terms implied in fact and terms implied in law
• the business efficacy and officious bystander tests for implication in fact
• the circumstances in which terms are implied in law as a necessary incident of a type of contract
• the key statutory implied terms in contracts for goods and services (SGA 1979, SGSA 1982, CRA 2015)
• the classification of implied terms (condition, warranty, innominate) and the consequences of breach
• the role of custom/usage in implying terms and the limits on custom (certainty, notoriety, reasonableness, consistency with express terms)
• modern authority on implication: BP Refinery conditions; the Marks and Spencer v BNP Paribas approach (necessity, not mere reasonableness; no inconsistency with express terms)
• the effect of s 15A SGA 1979 (slight breach treated as warranty in B2B sales) and interaction with UCTA 1977 reasonableness for exclusions of SGA/SGSA implied terms
• CRA 2015 remedies for breach of implied terms for goods, digital content and services, and non-excludability of core consumer rights

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What are the two main common law tests for implying a term into a contract in fact?
2. Which statute implies terms as to satisfactory quality and fitness for purpose in business-to-business sales of goods?
3. True or false? Terms implied in law are based on the presumed intentions of the parties.
4. What statutory term is implied into all consumer contracts for services under the Consumer Rights Act 2015?

Introduction

Most contracts contain both express and implied terms. Implied terms are not written down or expressly agreed but are inserted into the contract by the courts, by statute, or by established custom. These terms can be just as important as express terms, and their breach can lead to serious consequences. The courts are cautious: implication is not a vehicle to rewrite bargains or to reach a fair result; rather, a term will be implied only where that is necessary for the contract to function as intended, or where the law requires standard incidents in particular categories of contract.

It is also important to separate interpretation from implication. The modern approach is sequential: the court first interprets the express terms; only if, after interpretation, there remains a gap that must be filled in order to make the contract workable will the court consider implication. A term will never be implied that contradicts the express language or allocation of risk agreed by the parties.

Key Term: terms implied in fact
Terms inserted by the court into a particular contract to give effect to the presumed intentions of the parties, based on necessity.

Terms Implied by Common Law

Implied terms at common law fall into two categories: terms implied in fact and terms implied in law. In addition, established custom can imply terms where the standard is certain, notorious, reasonable, and consistent with the express bargain.

Terms Implied in Fact

A term may be implied in fact to reflect what the parties must have intended, judged objectively, in the specific circumstances of their contract. The courts use two main tests:

• business efficacy (would the contract lack commercial or practical coherence without the term?); and
• officious bystander (is the term so obvious that both parties would have agreed to it if asked at the time?).

These two tests are related facets of the same inquiry into necessity, not mere reasonableness. Classic authority is The Moorcock, where the court implied a term that a jetty owner would take reasonable care that a mooring would be safe at low tide, because otherwise the contract to use the jetty would have been an “opportunity of danger”.

The leading modern restatement is Marks and Spencer v BNP Paribas (2015). The Supreme Court reaffirmed that:

• the test is business necessity; obviousness is helpful but not essential;
• a term will not be implied merely because it would be fair or because the parties would probably have agreed to it if asked;
• implication cannot contradict an express term or the substance of the express allocation of risk; and
• interpretation and implication are distinct but related processes, and implication is considered only after construing the express words.

The BP Refinery conditions (often cited as a helpful checklist) remain an influential summary in implication cases. They ask whether the proposed term:

• is reasonable and equitable;
• is necessary to give business efficacy (i.e., without it the contract would lack commercial coherence);
• is so obvious that it goes without saying;
• is capable of clear expression; and
• does not contradict any express term.

Key Term: business efficacy test
A test for implication in fact: is the term necessary to make the contract effective and workable in a commercial sense?

Key Term: officious bystander test
A test for implication in fact: would both parties have said “of course” if an officious bystander had proposed the term at the time of contracting?

The courts apply these tests strictly. A term will not be implied just because it seems reasonable or fair. It must be necessary for the contract to function as intended, and it must not contradict the express language or the essence of the express bargain. A careful warning was issued in Ali v Petroleum Company of Trinidad and Tobago (2017): necessity must not be watered down.

Worked Example 1.1

A business leases a warehouse for storage. The contract is silent on whether the landlord must repair the roof. A leak develops, damaging the tenant’s goods. Can the tenant argue there is an implied term requiring the landlord to keep the roof in repair?

Answer:
Possibly. If the lease would be unworkable without the landlord repairing the roof, the court may imply such a term for business efficacy. If both parties would have agreed that the landlord should be responsible if asked, the officious bystander test may also be satisfied. The court will examine whether the implied duty is one of reasonable care (to avoid contradicting any express allocation of repair responsibilities).

Terms Implied in Law

Some terms are implied into all contracts of a certain type, regardless of the parties’ intentions, as a matter of legal policy. The focus here is not a specific bargain but the category of relationship.

Key Term: terms implied in law
Standard terms inserted by the court into all contracts of a particular type (e.g., employment, tenancy) to ensure proper functioning of that category of agreement.

A classic example is the implied term in residential leases that the landlord must take reasonable care to keep common parts in reasonable repair (Liverpool City Council v Irwin). In employment contracts, an implied term of mutual trust and confidence requires employers and employees not to act in a manner calculated or likely to destroy or seriously damage the relationship (Mahmud v BCCI). In Scally v Southern Health and Social Services Board, a narrowly framed obligation was implied requiring an employer to take reasonable steps to notify employees of a valuable contractual right dependent on employee action where the employee could not reasonably be expected to know of it. More generally, where a party has a contractual discretion (for example, to set an interest rate or a bonus), a term is often implied that the discretion will not be exercised capriciously, arbitrarily, or for an improper purpose (a Braganza-style duty), illustrated in Paragon Finance v Nash (interest rate discretion limited by an implied term).

The test for implication in law is not the same as implication in fact. The court may weigh reasonableness, fairness, and policy considerations when deciding whether a standard term should be implied into all contracts of a class. But, even here, the term must be formulated with precision and must not conflict with express words.

Terms Implied by Custom

Custom and usage can also imply terms, particularly in specialised trades or markets.

Key Term: terms implied by custom
Terms implied where there is a certain, notorious, reasonable and consistent trade or local custom, so well-known that contracting parties in that context are taken to have intended it to apply, unless excluded by express terms.

A custom may imply a term where it is:

• certain and uniform (not sporadic or equivocal);
• reasonable;
• notorious (well-known throughout the trade or locality); and
• consistent with express terms (an express clause prevails over custom).

Hutton v Warren is the classic authority for implication by custom. In practice, many well-developed customs are codified in industry rules. Whether codified or not, in English law custom’s force derives from the parties’ presumed intention in that market: the custom is treated as incorporated unless expressly displaced.

Worked Example 1.2

Two parties in the grain trade contract on a short confirmation note that does not mention moisture content. In that trade, a well-known custom treats a specified tolerance as acceptable without price adjustment. Can the buyer reject for minor excess moisture?

Answer:
Unlikely, if the custom is proved to be certain, notorious, reasonable, and consistent with the express bargain. The court may imply the customary tolerance term by custom, unless the contract expressly excludes it or is inconsistent with it.

Revision Tip

For SQE1, remember: terms implied in fact are about necessity in the specific contract; terms implied in law are about policy in a class of contracts. Custom can imply terms where usage is certain, notorious, reasonable, and consistent with the express deal.

Terms Implied by Statute

Statutes imply terms into many contracts, especially those for the sale of goods, supply of services, and consumer contracts. These terms are often conditions, so breach may entitle the innocent party to terminate the contract. Where exclusion is attempted in B2B contracts, the Unfair Contract Terms Act 1977 (UCTA) applies, and reasonableness is key.

Sale of Goods Act 1979 (SGA 1979)

The SGA 1979 applies mainly to business-to-business (B2B) contracts and some private sales. Key implied terms include:

Key Term: sale of goods act 1979 (sga 1979)
Statute implying terms as to title, description, satisfactory quality, and fitness for purpose in contracts for the sale of goods (mainly B2B).

• The seller has the right to sell the goods (s 12) — a condition that cannot be excluded.
• Goods sold by description will correspond with the description (s 13).
• Goods sold in the course of a business are of satisfactory quality (s 14(2)) — judged by what a reasonable person would regard as satisfactory, taking account of description, price, and all relevant circumstances; includes fitness for common purposes, appearance and finish, freedom from minor defects, safety and durability.
• Goods are fit for any particular purpose made known by the buyer (s 14(3)).
• Where goods are sold by sample, the bulk will correspond with the sample (s 15).

These terms are usually classified as conditions. Breach gives the buyer the right to reject the goods and terminate the contract, subject to statutory moderation in marginal cases. Notably, s 15A provides that where breach of s 13–15 is so slight that it would be unreasonable to reject the goods, a business buyer’s remedy is limited to damages (the breach is treated as a breach of warranty). In B2B contracts, attempts to exclude s 13–15 are controlled by UCTA 1977 s 6: exclusions are valid only if reasonable; liability for breach of s 12 cannot be excluded.

Worked Example 1.3

A wholesaler buys 5,000 tins described as 30 to a case. One-fifth of the consignment arrives in cases of 24 tins, but total quantity is correct and the tins are otherwise perfect. May the buyer reject the whole lot?

Answer:
The s 13 term (correspondence with description) is a condition, but s 15A may apply in B2B sales: if the deviation is so slight that rejection would be unreasonable, the breach is treated as a warranty, limiting the buyer to damages. The court will assess the materiality of the discrepancy in context.

Supply of Goods and Services Act 1982 (SGSA 1982)

The SGSA 1982 implies terms into contracts for services and for work and materials (mainly B2B). Key implied terms:

Key Term: supply of goods and services act 1982 (sgsa 1982)
Statute implying terms as to reasonable care and skill, reasonable time, and reasonable price in contracts for services (mainly B2B), and SGA‑style terms for goods supplied under work and materials contracts.

• Services will be carried out with reasonable care and skill (s 13).
• Services will be performed within a reasonable time (if not fixed) (s 14).
• A reasonable charge will be paid (if not fixed) (s 15).
• In contracts for transfer/hire of goods accompanying services, terms analogous to SGA are implied (e.g., title, description, quality, fitness).

The terms as to reasonable care and skill, time, and price are usually innominate terms. The terms as to goods supplied (e.g., quality, fitness) are usually conditions. UCTA 1977 regulates attempts to exclude these implied terms in B2B contracts; reasonableness is required for any effective exclusion (e.g., exclusions of s 13 SGSA or s 14 SGA obligations).

Key Term: reasonable care and skill (sgsa 1982 / cra 2015)
The statutory standard that services must be performed with the care and skill expected of a competent professional in that field.

Consumer Rights Act 2015 (CRA 2015)

The CRA 2015 applies to contracts between traders and consumers. It consolidates and updates consumer protection law, implying key terms into contracts for goods, digital content, and services, and rendering many exclusions ineffective.

Key Term: consumer rights act 2015 (cra 2015)
Statute implying non-excludable terms into trader-consumer contracts for goods, digital content, and services, coupled with structured consumer remedies.

Implied Terms for Goods (ss 9–11, 17)

• Goods must be of satisfactory quality (s 9).
• Goods must be fit for any particular purpose made known by the consumer (s 10).
• Goods must match their description (s 11).
• Trader must have the right to supply the goods (s 17).

Core rights relating to goods cannot be excluded or restricted (s 31), and CRA provides a structured remedies regime (s 19–24): a short‑term right to reject (usually 30 days), repair/replace, and then a final right to reject or a price reduction if repair/replace fails or is not possible. If a fault appears within six months, it is presumed present at delivery unless the trader proves otherwise.

Implied Terms for Services (ss 49, 51, 52)

• Services must be performed with reasonable care and skill (s 49).
• A reasonable price must be paid (if not fixed) (s 51).
• Services must be performed within a reasonable time (if not fixed) (s 52).

Where these are breached, the consumer can require repeat performance (where feasible) or a price reduction (s 54–56). These rights are non-excludable (s 57), subject to the statute’s fairness and transparency framework.

Digital content is also protected (ss 34–43): digital content must be of satisfactory quality, fit for purpose, and as described; specific remedies apply (repair, replacement, price reduction), and if faulty digital content damages a consumer’s device or other digital content, the trader may be liable to repair or compensate (s 46).

Worked Example 1.4

A consumer hires a plumber to fix a leaking pipe. The plumber completes the job, but the leak returns within a week due to poor workmanship. What statutory term has been breached, and what remedy is available?

Answer:
The implied term under s 49 CRA 2015 (reasonable care and skill) has been breached. The consumer can require repeat performance or a price reduction under the CRA 2015.

Exam Warning

For SQE1, be careful to distinguish between terms implied in fact (necessity in the specific contract), terms implied in law (policy for a class of contracts), terms implied by custom (only where usage is certain, notorious, reasonable and consistent), and terms implied by statute (Parliament’s rules for certain contracts). Never imply a term that contradicts an express term or the essence of the express allocation of risk. Remember UCTA controls B2B attempts to exclude SGA/SGSA implied terms (reasonableness), and CRA generally prohibits exclusion of core consumer rights.

Summary

Worked Example 1.5

A contract states that a bank “may vary the interest rate from time to time.” The bank sets rates significantly above market levels, solely to improve its profit margins, and without reasonable justification. Is there an implied limit on the bank’s discretion?

Answer:
Yes. A term is likely to be implied in law that contractual discretion must not be exercised arbitrarily, capriciously, or for an improper purpose (Braganza‑type duty). In Paragon Finance v Nash, the court limited an interest rate discretion in this way. The exact standard will depend on the contract, but a rationality and proper purpose constraint is typical.

Key Point Checklist

This article has covered the following key knowledge points:

• Contracts may contain both express and implied terms.
• Terms can be implied by the courts (in fact or in law), by custom, or by statute.
• Terms implied in fact are inserted only if necessary for the contract to work, using the business efficacy and officious bystander tests, and must not contradict express terms.
• BP Refinery conditions provide a helpful checklist for implication in fact; Marks and Spencer v BNP Paribas confirms necessity, not mere reasonableness, and the sequential approach (interpretation first).
• Terms implied in law are standard terms for a class of contract, based on policy; examples include landlord obligations for common parts, the employment term of mutual trust and confidence, and limits on the exercise of contractual discretion.
• Custom/usage can imply terms if the custom is certain, notorious, reasonable, and consistent with the express deal; express terms prevail over custom.
• Statutes such as SGA 1979, SGSA 1982, and CRA 2015 imply key terms into contracts for goods and services.
• In B2B contracts, s 13–15 SGA and analogous SGSA terms are conditions but s 15A SGA can reduce slight breaches to warranties; exclusions are subject to UCTA reasonableness (s 6).
• In consumer contracts, core CRA rights for goods, digital content and services are non-excludable, with structured remedies (short‑term right to reject; repair/replace; final right to reject or price reduction; repeat performance/price reduction for services).
• The classification of an implied term (condition, warranty, innominate) affects the remedies available for breach.

Key Terms and Concepts

• terms implied in fact
• business efficacy test
• officious bystander test
• terms implied in law
• terms implied by custom
• sale of goods act 1979 (sga 1979)
• supply of goods and services act 1982 (sgsa 1982)
• reasonable care and skill (sgsa 1982 / cra 2015)
• consumer rights act 2015 (cra 2015)