D. Implied Terms

• Author: John D. McCamus
• Profession: Professor of Law. Osgoode Hall Law School, York University
• Pages: 729-748

Contenidos

• 1) Introduction.
• 2) Terms Implied from Custom or Usage.
• 3) Terms Implied in Fact.
• 4) Terms Implied in Law.
• 5) Implied Statutory Terms.

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1) Introduction

In the course of construing or interpreting agreements, courts often conclude that the parties have not given complete expression to their agreement and that gaps in the agreement must be filled in with implied terms. Gaps or omissions may arise because the parties have contented themselves to agree only to the main or essential terms of the agreement. Alternatively, the parties may simply not have foreseen and provided for a point of difficulty or a contingency that emerges in the course of their contractual relationship. The practice of implying terms in such circumstances is well established. Implied terms constitute an important and pervasive source of contractual obligation. At the same time, courts frequently observe that they will not construct agreements for the parties and further, that the implying of contractual terms is an analytical device to be used sparingly and with caution. This traditional view was set forth by Cory J.A., as he then was, in the following terms:

When may a term be implied in a contract? A court faced with that question must first take cognizance of some important and time-honoured cautions. For example, the courts will be cautious in their

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approach to implying terms to contracts. Certainly a court will not rewrite a contract for the parties. As well, no term will be implied that is inconsistent with the contract. Implied terms are as a rule based on the presumed intention of the parties and should be founded on reason. The circumstances and background of the contract, together with its precise terms should all be carefully regarded before a term is applied. As a result, it is clear that every case must be determined in its own particular facts.¹²¹

It is important to note that, in this passage, Cory J.A. is referring to implied terms based on the presumed intentions of the parties. There are two different categories of implied terms resting on presumed intentions. The first consists of implied terms incorporating custom or usage. The second category consists of terms implied that appear to be made necessary by or are, in some sense, obvious from the circumstances of the particular transaction. Such terms are often referred to as being implied in fact.¹²²Implied terms in either category rest on the presumed intentions of the parties and, as Cory J.A. suggests, their implication would be defeated, therefore, by the presence of an explicit and inconsistent term of the parties’ agreement. There is, however, a third category of implied terms, terms implied by law,¹²³to which these propositions do not apply or do not apply to the same degree. Terms implied by law were characterized by Le Dain J. in Canadian Pacific Hotels Ltd. v. Bank of Montreal¹²⁴as "the third category of implication, which does not depend on presumed intention - the implication of terms as legal incidents of a particular class or kind of contract, the nature and content of which have to be largely determined by implication."¹²⁵As we shall see, terms implied by law may be quite inconsistent with the actual and unexpressed intentions of one of the parties, but are implied in the agreement in order to ensure that the agreement between the parties is, in the court’s view, a fair and reasonable one. Further, although inconsistent terms in an agreement normally trump terms that otherwise would be implied by law, courts may be reluctant

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to conclude that a particular contractual provision is, indeed, truly inconsistent with a term implied by law.

The implication of terms resting on the presumed intentions of the parties - whether based on custom or usage or on the particular circumstances of the agreement - may appear to be justifiable on the basis that the court is engaging in an exercise designed to give effect to the will of the parties. The phrase "presumed intention of the parties" is, however, an inherently ambiguous one. Glanville Williams captured this ambiguity by suggesting the following as two different types of implied terms: "(i) ... terms that the parties ... probably had in mind but did not trouble to express; (ii) ... terms that the parties, whether or not they actually had them in mind, would probably have expressed if the question had been brought to their attention."¹²⁶As Williams noted, the first type of implication is an attempt to determine what the parties were actually thinking. In this category, it is presumed that the implied term is what the parties actually intended but did not express. The second type is an attempt to discern a hypothetical intention that the parties would have formulated if they had anticipated the problem in question. If the first category represents what is essentially a factual inquiry, the second is obviously more speculative. As a practical matter, of course, it may be difficult to draw a clear distinction between these two types of implications. This ambiguity is present in judicial discussions of the implication of terms. Although reference is frequently made to "presumed intentions," it is often not entirely clear whether a particular judge is referring to presumed actual intentions or to the presumed hypothetical intentions of the parties to the agreement. It is important to note, however, that notwithstanding occasional references in the judicial rhetoric surrounding the implication of terms to the need to give effect to the "intentions" of the parties - thus intimating, perhaps, that the court is confined to a search for the actual intentions of the parties - it is plainly the case that terms implied in fact are commonly implied on the basis of presumed hypothetical intentions. In the typical case, there is little or no evidence and little or no judicial discussion of the question of whether the parties actually intended that which is being implied and simply neglected to "write it down." Accordingly, the implication of terms in fact sits uneasily on a rationale of simply giving effect to the will of the parties. Inescapably and, perhaps, seamlessly, the exercise becomes one of implying into the agreement, on an objective basis, reasonable terms that, it is assumed, the parties would or ought to have agreed to if the matter

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had been raised at the time of contracting. Ultimately, the rationale for the implied in fact term may be that, when required to fill a gap left in the agreement between the parties, courts should attempt to fill that gap with an implied term that accords with fundamental notions of reasonableness and fair dealing.¹²⁷Williams distinguished the first two categories of implied terms from a third, which corresponds to the category referred to here as terms implied by law. He described this third category as follows: "(iii) ... terms that, whether or not the parties had them in mind or would have expressed them if they had foreseen the difficulty, are implied by the Court because of the Court’s view of fairness or policy or in consequence of rules of law."¹²⁸Terms implied by law could conceivably correspond to the intentions of the parties if the parties are both fair and reasonable people who share the court’s view of the appropriateness of the particular implied term. In such circumstances, the term implied by law may correspond precisely to the actual or presumed hypothetical intentions of the parties. As Williams notes, however, the important point is that the presence of such intentions is irrelevant to the court’s determination that such a term should be implied by law.

We turn, then, to consider the three categories of implied terms: those implied on the basis of custom or usage, those implied in fact and those implied by law. Finally, brief mention will be made of the phenomenon of implied statutory terms.

2) Terms Implied from Custom or Usage

Where there are, in particular trades or commercial contexts, established customs or usages relating to the terms on which parties deal with each other, such custom or usage may provide a basis for an implied term. In Hutton v. Warren,¹²⁹Parke B. offered the following influential explanation for this proposition:

It has long been settled, that, in commercial transactions, extrinsic evidence of custom and usage is admissible to annex incidents to

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written contracts, in matters with respect to which they are sound. The same rule has also been applied to contracts in other transactions of life, in which known usages have been established and prevailed; and this has been done upon the principle of presumption that, in such transactions, the parties did not mean to express in writing the whole of the contract by which they intended to be bound, but a contract with reference to those known usages.¹³⁰In this passage, Baron Parke plainly rests the implication of terms setting forth known usages on the basis that the parties are presumed to have intended to deal on that basis. This theme is pervasive in the jurisprudence concerning this topic. Thus, in Liverpool City Council v. Irwin,¹³¹for example, Lord Wilberforce observed: "[w]here there is, on the face of it, a complete bilateral contract, the courts are sometimes willing to add terms to it, as implied terms: this is very common in mercantile contracts where there is an established usage: in that case the courts are spelling out what both parties know and would, if asked, unhesitatingly agree to be part of the bargain."¹³²As is often said, the custom or usage must be "notorious."¹³³Similarly, in the decision of the Supreme Court of Canada in Georgia Construction Co. v. Pacific Great Railway Co.,¹³⁴Duff J. made the following observation: "Usage, of course, where it is established, may annex an unexpressed incident to a written contract; but it must be reasonably certain and so notorious and so generally acquiesced...