January 15, 2024
As we roll into another busy year for construction in Australia, there will be projects at all stages – those that are in the contract formation stage, set to commence, or coming to end. Wherever project participants may find themselves on a project’s life cycle, it is a timely reminder to ensure parties remember some of the nuances of obligations that may implicitly exist, or that may survive once a contract has concluded or been terminated.
This three-part series will consider a number of less obvious, but important, obligations including:
- implied terms;
- statutory obligations; and
- arbitration clauses.
Implied Terms
Construction contracts often involve terms that are not explicitly articulated within the written provisions of the contract. These unspoken obligations, known as implied terms, can significantly impact the rights and responsibilities of the parties involved. Even if there is an absence of prior agreement between contracting parties in respect of these terms, they can be imported into a contract (as a matter of law).
A term may be implied into a contract in a number of ways, including:
- in fact;
- by law; and
- by custom or usage.
In this article, we will take a closer look at the key principles of implied terms applied in Australia.
In fact
A court may imply a term in fact into a contract where it considers the term is necessary to give business efficacy to the contract, so that the contract operates in a way that both parties intended.
For a term to be implied in fact, it must:
- be reasonable and equitable;
- be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
- be so obvious that “it goes without saying”;
- be capable of clear expression; and
- not contradict any express term of the contract.[1]
The courts apply a different approach for informal contracts (i.e., oral contracts, or contracts that have not been completely reduced to written form). In this case, a court will consider implying a term where it is necessary for the reasonable or effective operation of a contract in the circumstances of the case.[2]
To avoid ambiguity and lessen the likelihood of disputes, parties should ensure their construction contracts are in writing and use clear and concise language to record the extent of the agreement.
By law
A number of terms may be implied by law into certain types of contracts. These terms operate to prevent a party’s rights from being seriously undermined, or rendered worthless, if the terms were not imported into a contract.
For example, the Australian Consumer Law provides a number of consumer guarantees that apply to certain contracts. In contracts for the sale of goods, there is a guarantee that the goods will be of acceptable quality and are reasonably fit for the disclosed purpose. This is particularly relevant for builders who supply goods and services to domestic consumers.
Similarly, various state legislation provides a number of implied terms that apply to domestic building projects that operate to protect the consumer. For example, Schedule 1B of the Queensland Building and Construction Commission Act 1991, sets out a number of statutory warranties that apply to all domestic building contracts, including that:
- all materials supplied will be good and suitable for the purpose for which they are used;
- unless otherwise stated in the contract, all materials will be new;
- the work will be comply with all relevant laws and regulations; and
- the work will be carried out in an appropriate and skilful way and with reasonable care and skill.
These terms are implied to protect the consumer, irrespective of whether or not the parties had turned their mind to the terms, or expressly included them in the contract.
Parties to domestic building contracts should be aware that statutory warranties cannot be excluded from a contract, and any term that seeks to do so will be considered void.
Part 2 of this article series will explore a selection of statutory obligations in more detail.
By custom or usage
Terms may also be implied by custom or usage. In practice, this means that where a contract is made in certain trades or professions, terms can be implied because parties within these trades or professions always contract on the basis of such terms (i.e., by customary or normal practice). For example, it may be normal practice that a tradesperson subcontracted to a builder will supply its own tools and labour to complete the work under the contract.
The Australian position for implying a term on the basis of custom or usage is as follows:[3]
- the existence of a custom or usage that will justify the implication of a term into a contract is a question of fact;
- the custom or usage must be so well known and acquiesced in that everyone making a contract in the circumstances can reasonably be presumed to have imported the custom or usage as an implied term;
- a term will not be implied into a contract on the basis of custom or usage where it contradicts an express term of the contract; and
- a party may be bound by a custom or usage, even if the party has no knowledge of it.
Terms are less likely to be implied by custom or usage than on the alternative bases discussed above. However, parties are encouraged not to leave such matters to chance. Rather, parties should expressly draft into a contract (or expressly exclude) any particular custom or usages intended to be followed by the parties.
Drafting Considerations
A court will not imply a term merely because it is reasonable, nor will it reconstruct a bargain struck between two parties. What a court can do is establish what the parties actually agreed at the outset, and rectify the contract to give effect to the presumed intentions of the parties.
Parties are reminded that, in order to avoid ambiguity and any unintended consequences, terms they wish to see in a construction contract should be expressly included, or excluded.
Given the potential implications of implied terms, parties should engage in meticulous drafting. Careful consideration should be given to whether certain terms can, and should be, expressly excluded. The use of clear and unambiguous language in drafting is essential in order to achieve the objective of a term.
In navigating the complexities of construction contracts, parties are urged to remain cognisant of the existence and implications of implied terms. Clear and precise drafting, along with a thorough understanding of applicable laws and industry practices, is essential to mitigate the risk of disputes and ensure that the contractual framework aligns with the intentions and expectations of all parties involved.
Lamont Project & Construction Lawyers
We have the industry knowledge and experience to assist both Principals and Contractors in all major infrastructure projects. If you have any question about any matters raised in the above article, or more generally as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Kristopher London
Email: [email protected] or [email protected]
Phone: (07) 3248 8500
Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064
Postal Address: PO Box 1133, Milton Qld 4064
[1] BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPCHCA 1.
[2] Hawkins v Clayton (1988) 164 CLR 539.
[3] Con-Stan Industries of Australia Pty Ltd v Norwich Winterhur Insurance (Australia) Ltd (1986) 160 CLR.