When nothing is something
Construction contracts in Australia consist of both express and implied terms. Express terms are clearly stated and agreed upon by the parties involved. Implied terms, on the other hand, are “unspoken” but still considered part of a construction contract.[1]
This article will consider the concept of implied terms in Australian construction contracts, their legal basis, types and significance in shaping project outcomes.
What are implied terms?
Implied terms form an essential part of the contract and are legally enforceable in principle. Courts either infer these terms to give effect to the parties’ intentions or read them into the contract by the operation of law.[2] Implied terms in construction contracts derive their legal foundation from common law, statute, and custom:
- Implied by fact: these terms are necessary for giving effect to the parties’ intentions and are inferred based on their conduct and surrounding circumstances[3];
- Implied by law: these terms are imposed on the parties by courts or statutes, regardless of their intentions. An example includes the implied warranties in a residential contract under section 18B of the Home Building Act 1989 (NSW); and
- Implied by custom: these terms become part of a contract due to established practices and usages in a specific trade or industry[4]. Examples include methods of measurement and the scope of trades.
Implied terms in construction contracts
Some examples of implied terms in Australian construction contracts are:
- Quality of goods supplied: there is an implied term that a contractor who undertakes to do work and supply materials under a contract warrants that the materials will be of good and proper quality and also enshrined in the Australian Consumer Law[5];
- Duty to cooperate: there is an implied duty in a contract for the parties to do all such things as are necessary on his party to enable the other party to have the benefit of the contract (in this case, to cooperate to ensure the successful completion of the project[6]);
- Fitness for purpose: there is an implied term that the completed work will be fit for purpose, which is enshrined in common law[7] and also in statute[8].
- Duty of good faith: this implied term requires parties to act honestly and fairly towards each other and refrain from any conduct that may undermine the other party’s interests.[9] However, the supposed implied term of good faith remains unsettled by the High Court of Australia and remains a contentious topic in the construction industry.
When will a term be implied?
With the evolution of construction contracts and how they are drafted, reviewed and negotiated, Courts have been reluctant to imply terms into contracts where the agreement has previously been carefully thought out and reduced to writing. The enforceability of implied terms and their application will depend on whether they meet certain criteria:
- Implied by fact: the term should be necessary to give effect to the parties’ intentions and should be consistent with the express terms of the contract.[10] The term must be so obvious that it goes without saying or be capable of clear expression.[11] However, even when these criteria are met, when considered against the terms of an often sophisticated and elaborate contract, the Courts are often reluctant to make inferences about what they believe the parties’ intentions are;
- Implied by law: such terms are much more easily dealt with, as the criteria for their enforcement is set out in statute; and
- Implied by custom: the custom must be well-known, certain, reasonable, and consistent with the express terms of the contract.[12]
Key takeaway
Understanding and acknowledging the role of implied terms in Australian construction contracts is crucial for contractors to ensure the success of a contract. Contractors must note that:
- in order to exclude the implication of terms you do not wish to include in a contract, you must expressly state that it is not implied; and
- a contract must expressly state those terms fundamental to the operation of the agreement.
If you would like to discuss this article with us further, do not hesitate to contact Brett Vincent (Partner) or Jennapher Khouzame, Graduate Lawyer, on (02) 9261 5900.
[1] Carter, Peden & Tolhurst, 2015.
[2] Paterson, Robertson & Duke, 2016.
[3] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.
[4] Byrne v Australian Airlines Ltd (1995) 185 CLR 410.
[5] Julian Bailey Construction Law; Div 1 Australian Consumer Law.
[6] Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17.
[7] Bailey; Hawkins v Clayton (1988) 164 CLR 539.
[8] Section 18B of the Home Building Act 1989 (NSW).
[9] Renard Constructions Case (Carter, Peden & Tolhurst, 2015). United Group Rail Services Ltd v Rail Corporation (NSW) [2009] NSWCA 177; Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184.
[10] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.
[11] BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266).
[12] Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur (Aust) Ltd (1986) 160 CLR 226.