In what situations are contracts supplemented with implied terms?
Courts imply terms into a contract for many reasons. We look at the following situations where contracts are supplemented with implied terms:
- (1) Implying terms when the parties omitted an essential term.
- (2) The implied obligation of good faith and fair dealing.
- (3) Implied warranties.
Rule supplying an omitted essential term
When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.
Implied terms and interpretation are closely linked. In implying terms, courts use many of the tools of interpretation to try to determine what the parties intended from the language, context, course of performance, trade usage, and course of dealing.
UCC Gap Fillers
The UCC specifically provides for gap fillers—i.e., default terms that a court may supply if the parties fail to include them in the bargaining process but otherwise intend to enter into a contract. Under the UCC, a missing term does not show indefiniteness so long as the parties intended to form a contract. UCC §2-204(3) states: “Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.” A selection of the UCC gap fillers includes the following:
- (1) Open price term
- (2) Place for delivery
- (3) Time for provisions
- (4) Time for payment
- (5) Risk of loss
- (6) Buyer’s right to inspection
Rule for open price term
The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if:
- (a) nothing is said as to price; or
- (b) the price is left to be agreed by the parties and they fail to agree; or
- (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.
A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.
Rule for absence of specific time provisions; notice of termination
(1) The time for shipment or delivery or any other action under a contract if not provided in this Article or agreed upon shall be a reasonable time.
(2) Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.
(3) Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.
Common law absence of specific time provisions rule
Valid contracts are often made which do not specify the time for performance. Where the contract calls for a single performance such as the rendering of a service or the delivery of goods, the time for performance is a reasonable time.
The determination of what is reasonable turns on the facts and circumstances and would include an examination of the type of transaction, the parties, any language that is relevant, course of performance, course of dealing, and trade usage.
Rule of implied obligation of good faith and fair dealing
Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.
The typical situations where courts apply the duty of good faith and fair dealing are breaches where the following occurred:
- Dishonesty of one party.
- Plaintiff had inadequate bargaining power or financial vulnerability and the contract is unfair. Implying a term avoids an inequitable result permitted by a contract’s express terms.
- Where the contract includes a “satisfaction clause” allowing one party to accept or reject performance of the other.
- In “exclusive dealership” contracts to ensure that a party makes reasonable or best efforts in performance of their duties.
Definition of good faith
Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing.
Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.
Rule for satisfaction clauses
If a party has a right to reject performance based on a satisfaction clause, then the decision to accept performance must be made according to a reasonable person standard.
Exception: In matters of aesthetics, where subjective tastes differ, a party can reject performance for any reason so long as their decision was made in good faith.
Implied obligation of reasonable efforts
When two parties have agreed to an exclusive dealership relationship or splitting profits from some common venture, then courts have implied an obligation to make reasonable efforts in the performance of their duties.
In some agreements, the parties agree to split the profits from an enterprise. If the enterprise is in the sole control of one party, then courts may imply a duty to operate the business in such a way that there are profits. Naturally, the obligation does not exist if the parties agree otherwise.
UCC rule for exclusivity contracts
UCC §2-306(2) provides that if parties enter into an exclusive dealership agreement, then an implied obligation exists by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.
UCC §2-306(2) describes the obligation of “best efforts” as reasonable diligence as well as good faith in their performance of the contract.
UCC Rule for express warranties
Express warranties by the seller are created as follows:
- (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
- (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
- (c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
To form an express warranty, it is not necessary that the seller use formal words such as “warrant” or “guarantee,” but an affirmation merely of the value or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.
Rule for implied warranty of merchantability
Unless excluded, a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Goods to be merchantable must be at least such as
- (1) pass without objection in the trade under the contract description; and
- (2) in the case of fungible goods, are of fair average quality; and
- (3) are fit for the ordinary purposes for which such goods are used; and
- (4) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and
- (5) conform to the promises or affirmations of fact made on the container or label if any.
Unless excluded or modified other implied warranties may arise from course of dealing or usage of trade.
Rule for implied warranty of fitness for a particular purpose
Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.
Rule for exclusion or modification of warranties
(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but negation or limitation is inoperative to the extent that such construction is unreasonable.
(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous.
* Language to exclude all implied warranties of fitness is sufficient if it states, for example, that “There are no warranties which extend beyond the description on the face hereof.”
(3) Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like “as is,” “with all faults” or other language which in common understanding calls the buyer’s attention to the exclusion of warranties.
