Terms can be implied in a contract in three ways: by custom or trade usage, by law, or by courts. For a term to be implied by custom or trade usage, it must be reasonable, certain, and notorious within the relevant industry. The custom cannot contradict the express terms of the contract. Terms may also be implied by law through common law precedents or statutes that apply to certain types of contracts. Courts use the business efficacy and officious bystander tests to determine if a term should be implied. Under business efficacy, a term will be implied if it is necessary to make the transaction effective. The officious bystander test considers whether the term is so obvious that both parties would

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. 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. 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.