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Implied Terms

September 2012 – Question 5 (a)
By reference to decided cases, state the grounds on which a term may be imp...
contracts between landlord and tenants and contract between bankers and
customers. For implication by law, courts have app...
give the joint venture agreement business efficacy for 20 years. And if officious
bystander had asked about possible chang...
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Implied terms


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Contract Law I

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Implied terms

  1. 1. Implied Terms September 2012 – Question 5 (a) By reference to decided cases, state the grounds on which a term may be implied in a contract and the justification for such implication of terms. A contract may have rights and liabilities arising from terms which are implied to give effect to the parties’ presumed intentions in contrast of clearly expressed terms. However, an implication cannot be presumably added in a contract just to make the contract more just and reasonable as it had been warned by Lord Atkin in Bell v Lever Brothers. As reference to the case of Sababumi SB v Datuk Yap Pak Leong, there are 3 ways in which term can be implied which are by customs or trade usage, by law and by the courts. Custom and trade usage is implied based on the fact that it is well- known and identifiable thus parties have not deemed to include it in the express term. To classify a term to be implied by custom or trade usage, there are 3 basic requirements. Firstly, the term must not inconsistent with the express term of the contract itself. Section 92(e) of Evidence Act 1950 also allows extrinsic evidence of custom and trade usage as an exception of the parol evidence rule as long it does not contradict with the written contract. Secondly, before the custom could be implied it must be established of a reasonable practice. The custom must be notorious, certain and reasonable. Thirdly, the knowledge of the custom and trade is also vital. If a practise is reasonable, notorious and certain, then the party will be bound even if he is not aware and have no knowledge of it. However, if the practise is unreasonable but certain and notorious, it cannot constitute a practise but if the party itself agree to it, then it will bind him. In Cheng Keng Hong v Government of the Federation of Malaya, applicant submitted his tender to the Ministry of Education for the building of a school. A contract was entered into however dispute arose regarding the payment of electrical works done as it is different from the layout drawings which was included in the contract. The applicant contended that it was acceptable practice for contractors to construct their tenders based on minimum cost with best specification and layout drawings due to competition basis and but in reality the specification in the drawing shall be paid as extras. Court held that, there was inconsistency of the ‘acceptable practise’ alleged by applicant with the written contract. Besides that, the ‘acceptable practise’ makes it unreasonable for application of tender to be made as generally tender is offer to public to ensure which party may suits the best interest to make a contract. Moreover, the unreasonable practise does not bind the defendant as they have no knowledge on it. Thus, the practise shall not be treated as an implied term. Terms may be implied by law through common law or statues. The common law has implied terms into some types of common contract and where precedent arise in a contractual relationship such as contract between employer and employee,
  2. 2. contracts between landlord and tenants and contract between bankers and customers. For implication by law, courts have applied the test of necessity rather than reasonableness. In Malik and Mahmud v Bank of Credit and Commerce International, plaintiffs worked for the bank which went bankrupt due to massive fraud, connection with terrorists, money-laundering, extortion and a raft of other criminal activity on a global scale. Plaintiffs lost their jobs and they sought employment elsewhere, however, they could not find jobs. They sued the company for their loss of job prospects, alleging that their failure to secure new jobs was due to the reputational damage they had suffered from working with the bank. The court held that both the employer and employee owe to each other an obligation not to act so as to destroy the relationship of trust and confidence between them. The term of mutual trust and confidence would be implied into the contract as a necessary incident of the employment relation. Terms may also be implied by law through statutes such in section 14 of Sales of Goods Act 1957 which states that the implied condition in part of seller, implied warranty to buyer. Terms may be implied by courts to allow unexpressed intention of the parties to take effect depending on the terms of contract and surrounding circumstances. There are 3 tests for implying terms which are the business efficacy test, officious bystander test and combined test. Firstly, the business efficacy test will be satisfied if it can be shown that the term sought to be implied is necessary to give business efficacy to the transaction which is to enable the transaction to be efficient or produce the effect that was intended. Officious bystander is a test used to determine if an unstated condition was originally implied at the time of writing the contract. In the method, an investigator tries to determine if the contracting parties had intended to include the term ‘x’ in the contract. It is something so obvious that it goes without saying. While law on implied terms developed, courts combined and used both test called the combined test. In Sababumi SB v Datuk Yap Pak Leong, court held both tests must be satisfied before a term can be implied. In this case, Sandakan Turf Club was granted a license to operate lotteries thus the club entered into written agreement in 1987 with appellant stating that appellant was to buy 100 acres of land and construct a race course at his own expense, club agreed to sublease the land and race course to the appellant for 20 years, appellant to have exclusive rights to conduct all lotteries in Sabah and appellant have to pay 20% of all gross sales. A new licence was issued on 1995 to the appellant due to the repealed of law. However, the appellant’s activities were stopped by police. Appellant filed summon to seek declaration that the 1995 license was within the scope of the agreement by way of implied term. The court held that the 1995 licence could in fact be implied into the agreement. When both parties negotiate the agreement, they intended to
  3. 3. give the joint venture agreement business efficacy for 20 years. And if officious bystander had asked about possible change of law, parties who benefit would have answered ‘Of course’. In conclusion, a term may be implied by custom, law and courts. There are many justification to be taken on to ensure whether the terms may be consider an implied term such as its reasonableness, certainty and notoriety. Besides that, terms may be implied through the common law or statutes and lastly, through courts, there are business efficacy test and officious bystander test to determine the status of the term.