Understanding the Difference: Implied Terms of Law and Implied Terms of Fact

When it comes to contractual agreements, the concept of implied terms plays a critical role in defining the rights, obligations and expectations of the parties. In the area of finance, this distinction between implied terms in law and implied terms in fact is particularly important, as it can have a significant impact on the interpretation and enforcement of contracts.

Implied terms in law

Implied terms are those terms that are considered part of a contract even though they are not expressly stated in the written agreement. These terms are implied by the courts based on established legal principles, industry usage, or the nature of the transaction. They are considered necessary to give effect to the contract and to ensure a fair and reasonable result for both parties.
An example of an implied term is the duty of good faith and fair dealing. In many financial contracts, such as loan agreements or investment management contracts, the courts may imply a term that requires the parties to act in good faith and with due regard for the interests of the other party. This obligation exists even if it is not explicitly stated in the written contract because it is considered a fundamental principle of contract law.

Another example of an implied term is the duty to use reasonable care and skill. In professional service contracts, such as those between a financial advisor and a client, the law may imply a term that the service provider must exercise reasonable care and skill in the performance of its duties. This ensures that the client’s interests are protected, even if the specific standard of care is not explicitly stated in the contract.

Implied terms

In contrast, implied terms are those that are not expressly stated in the contract, but are implied into the contract because of the particular circumstances of the case, the conduct of the parties, or the factual context in which the contract was made.
For example, in a commercial lease, the courts may imply a term that the landlord is responsible for maintaining the structural integrity of the building, even if it is not expressly stated in the written contract. This implication may arise from the nature of the transaction, customary practices in the commercial real estate industry, or the reasonable expectations of the parties.

Another example of an implied term is the requirement of confidentiality in financial transactions. In certain financial agreements, such as mergers and acquisitions or private equity investments, courts may imply a term that the parties must maintain the confidentiality of sensitive information, even if it is not explicitly stated in the written contract. This implication may arise from the nature of the transaction, industry practices, or the reasonable expectations of the parties.

The distinction in practice

The distinction between implied terms of law and implied terms of fact is not always clear cut and courts may consider a combination of both in their analysis. However, the key difference lies in the source of the implication: implied terms in law are derived from legal principles and established precedents, while implied terms in fact are based on the specific circumstances of the case and the reasonable expectations of the parties.

In the context of finance, this distinction can have significant implications for contract interpretation, dispute resolution, and the allocation of risk and liability. Understanding the nuances of implied terms can help financial professionals and their legal advisors navigate complex contractual arrangements and ensure that the interests of all parties are properly protected.

Practical Considerations

When drafting and negotiating financial contracts, it is important for professionals to be aware of the potential for implied terms, both in law and in fact. This may involve carefully drafting the contract to address potential areas of ambiguity, explicitly stating the parties’ obligations and expectations, and documenting any industry-specific customs or practices that may be relevant.
In the event of a dispute, the distinction between implied terms in law and implied terms in fact may be particularly important. Courts may look to these implied terms to interpret the contract, determine the rights and obligations of the parties, and resolve any conflicts or disagreements.

By understanding the nuances of implied terms and their practical implications, financial professionals can better navigate the complex landscape of contractual agreements and ensure that their clients’ interests are effectively protected.

interests are effectively protected.

FAQs

Here are 5-7 questions and answers about the difference between terms implied in law and terms implied in fact:

What is the difference between terms implied in law and terms implied in fact?

Terms implied in law are standard terms that the law automatically implies into a contract, regardless of the intentions of the parties. They exist to address common situations and ensure fairness. In contrast, terms implied in fact are provisions that are not expressly stated in the contract, but are necessary to give business efficacy to the agreement based on the particular circumstances of the case and the presumed intentions of the parties.

Can you provide an example of a term implied in law?

An example of a term implied in law would be the implied warranty of merchantability in the sale of goods. This means that the goods sold must be of a reasonable quality for their intended purpose, even if this term is not explicitly stated in the contract.

How are terms implied in fact determined?

To determine a term implied in fact, the court will look at the the language of the contract, the surrounding circumstances, the purpose of the contract, and the common practices in the relevant industry. The term must be necessary to give business efficacy to the agreement and reflect what the parties would have agreed to if they had addressed the issue.

What is the legal test for implying a term in fact?

The legal test for implying a term in fact is the ‘officious bystander’ test, which asks whether the term would have been so obvious to the parties that an ‘officious bystander’ overhearing the negotiations would have said “of course you’ll include that”.

How do the implications of terms implied in law and fact differ?

Terms implied in law are mandatory and cannot be contracted out of, whereas terms implied in fact can be excluded by express terms in the contract. Additionally, the scope and effect of terms implied in law is more certain and predictable, whereas terms implied in fact are more flexible and dependent on the specific circumstances of the case.