A practical guide to implied terms
An implied term is a contractual term which has not been recorded in the written provisions of a contract, because it has not been expressly agreed. Parties should be mindful of the terms capable of being implied, as well as whether or not they can be expressly excluded. Catherine Simpson looks at some common implied terms in construction contracts, relating to quality, fitness for purpose, skill and care, and good faith.
The parties to a contract will often not give much thought to the fact that terms can be implied, usually by common law or by statute.1 Terms can also be implied by trade or industry custom and use, based on the conduct of the parties, or based on the intentions of the parties at the time the contract was entered into (although not if they are unreasonable or at odds with the express contract provisions).
Quality of goods and materials
Most construction contracts will contain an express term that the materials used are to be new and of satisfactory quality. However, where express wording has not been used, common law has found that a contractor will impliedly warrant that the materials supplied will be of good and proper quality. This will be the case unless it can be shown that the parties intended otherwise, which might be where, for example, the contractor is specifically directed to use a particular material and they have no control over its suitability.
There may be building standards or legislative requirements against which “quality” can be assessed, but generally it can be inferred that goods/materials will not be of satisfactory quality if they have been used for their normal or intended purpose and fail shortly after use. The implied obligation to use good and proper materials will be breached even if the contractor was unaware at the time of supply that they were inappropriate or defective. This is a key point to note for contractors, who will be unable to use, as a defence, the fact that they had no reasonable basis for knowing that the supplied materials were defective. In such circumstances, a contractor who is found liable would need to pursue their supplier.
There is similarly legislation which provides that contracts for the sale or supply of goods are subject to an implied term that they will be of satisfactory quality – see, for example, Sale of Goods Act 1979, section 14(2) and Supply of Goods and Services Act 1982, section 4(2). However, there are usually qualifications. Focusing on the sale of goods, an implied term of satisfactory quality might be qualified if the seller makes any limitations in the physical characteristics of the goods known to the purchaser, and the purchaser still chooses to accept the goods. Similarly, if the purchaser examined the goods before the contract for sale was entered into, or purchased on the basis of a supplied sample and any limitations in the goods were apparent at the time, the implied term as to quality may be qualified to the extent of the limitations.
Fitness for purpose
At common law, if the contractor assumes responsibility for design, there will usually be an implied warranty that the result of the work will be reasonably fit for the agreed or known purpose, provided the contractor was aware of the purpose at the time the contract was entered into. Such a warranty may also be implied where it is apparent that the employer is relying on the contractor to exercise skill and judgement to achieve a particular result.
Where a contractor is aware of the general purpose of the design but is not made aware of specific requirements as to the final performance or specification, the contractor will be required to exercise reasonable skill and care in performing its obligations. It is possible for a contract to expressly provide that the contractor does not warrant fitness for purpose, and that it only undertakes to exercise reasonable skill and care in performing its obligations. This is often the case where a contractor’s insurance policy does not cover the contractor against any liability it may have for breach of a fitness for purpose obligation. Few insurers cover this, so many parties will expressly exclude any fitness for purpose warranty.
If the contractor does not assume design responsibility, the implied warranty as to fitness for purpose will usually only relate to the supplied materials and the workmanship, to the extent that they are within the contractor’s control. An implied warranty to ensure that materials are reasonably fit for purpose is usually more onerous than an implied obligation that they be of satisfactory quality.
Quality of work
It will generally be an implied obligation of a contractor to perform and complete its work in a good and workmanlike manner. The contractor will typically be required to carry out its work with the skill and care of an ordinarily competent contractor in the circumstances of the actual contractor. Although the obligation will be implied at common law, it is often set out in an express contractual term (such as clause 2.1 of the JCT Standard Building Contract, 2016 edition and clause 7.1(b)of the FIDIC Red Book (2nd edition, 2017).
A contractor might be in breach of this obligation if they have used unsatisfactory materials. The fact that a contractor supplies labour, but not materials, does not excuse them should the works turn out to be defective due to the use of incorrect materials, or use of materials in an incorrect manner, where the contractor knew, or ought to have known, that by performing the work in the manner they did, there would be a defect. Nor does the fact that the contractor was not responsible for the preparation of the design excuse them from responsibility for defects in the works, where it ought to have been clear that the design was materially deficient.
Of important note is that it is the duty of the contractor to draw to the attention of the employer the fact that they are unable to perform the work satisfactorily. So, where a contractor knows, or ought to know, that the works they have been asked to perform will be defective or unsatisfactory for their known purpose, the contractor should draw this to the attention of the employer and seek instructions on how to proceed before carrying out any work.
Duty to exercise reasonable skill and care
At common law, it is the implied contractual duty of a professional person who holds themselves out as possessing a particular skill that, when employed to do work that requires the application of that skill, they will exercise reasonable skill and care in the art they profess.
Similarly, under the Supply of Goods and Services Act 1982, where services are supplied pursuant to a contract as part of a business, it will be an implied term that the supplier will carry out their services with reasonable skill and care – see section 13.
Duty to act in good faith
Although there is no overarching principle of good faith applying to contracts governed by English law, the obligation to act in good faith may be inferred into construction contracts on a piecemeal basis. This is namely to overcome problems of unfairness. An obligation to act in good faith generally requires the parties to cooperate to achieve the contractual objectives and compliance with honest standards of conduct or those that are reasonable having regard to the interests of the parties.
There have been moves to introduce the concept of good faith into construction contracts by express terms. For example, the NEC4 contains a requirement on the parties to act “in a spirit of mutual trust and cooperation” (clause 10.2). However, the law will not usually fill gaps in the contract by implying a term that the parties are to act in good faith where the contract already contains detailed terms setting out the respective rights and obligations of the parties. Accordingly, this will be rare in practice.
Are there other terms which may be implied?
The common law does not generally imply an obligation into construction contracts that the contractor is required to perform its works in accordance with all applicable laws. Such a term may, however, be implied ad hoc in the particular circumstances of the parties. For example, it may be an implied term that the contractor’s works, when completed, will be of sufficient quality to comply with the applicable building laws or regulations concerning such work.
There are a number of other terms which may be implied by common law, including a duty to co-operate, a duty to give possession of the site within a reasonable time for certain types of contract, and an obligation on the employer not to hinder or prevent the contractor from carrying out its obligations and executing the works. Many of these terms can be excluded expressly or by surrounding circumstances.
What does this mean?
The fact that terms can be implied is a valuable reminder of the need for careful negotiation and drafting. Parties should be mindful of the terms capable of being implied and consider whether any can, or should, be expressly excluded. If they can be excluded, the contractual exclusion terms must be clear and unambiguous to minimise the risk of a later dispute. It is also worth noting that an express term will only be upheld if it is reasonable for the purposes of the Unfair Contract Terms Act 1977.
The parties would also be wise to consider an entire agreement clause. Entire agreement clauses provide that only those terms set out in the signed agreement form part of the contract. However, note that the inclusion of an entire agreement clause will not always preclude the bringing of a claim for implied terms.
- 1. Such as the Late Payment of Commercial Debts (Interest) Act 1998 implying the right to interest on late payments at the rate of 8% over base unless the contract already contains a “substantial contractual remedy for late payment”, the Contracts (Rights of Third Parties) Act 1999 implying a right for a third party to enforce a contractual term if the contract expressly provides for it, and the Defective Premises Act 1972 implying for the provision of a new dwelling a term that the dwelling, when completed, will be reasonably fit for human habitation.
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