LAW5002 · Principles of Contract Law A
Implied Terms
Implied Terms is Week 10 of Monash University LAW5002 Principles of Contract Law A, and the last question in a terms problem: once you know which words got in and what they mean, does the contract carry an unwritten obligation too? Courts imply terms along three routes — in fact (this individual contract, through the BP Refinery five-point test), in law (into every contract of a class, on a test of necessity), and by custom — plus the unsettled duty of good faith. Because all topics covered in class are examinable in the final, this topic rewards a clean, IRAC-structured analysis that holds the line between necessary and merely reasonable.
What this chapter covers
- 011. The three routes to an implied term — in fact (this contract), in law (a class of contract), and by custom (trade usage)
- 022. Implied in fact: the BP Refinery five-point test and why all five limbs must be satisfied (BP Refinery (Westernport) v Hastings Shire Council)
- 033. The business-efficacy core — a term is implied only where necessary, not merely reasonable (The Moorcock; Codelfa)
- 044. The officious-bystander limb and the 'not contradict an express term' knockout
- 055. Informal contracts use a looser necessity test, and the modern framing asks what reasonable parties intended (Hawkins v Clayton; Realestate.com.au v Hardingham)
- 066. Implied in law: a necessary incident of a class of contract, with the High Court's caution (Liverpool City Council v Irwin; Breen v Williams)
- 077. Implied by custom: a notorious, certain, reasonable usage not contrary to the contract (Con-Stan Industries)
- 088. The unsettled duty of good faith — recognised for discretionary powers but left open by the High Court (Renard; Burger King v Hungry Jack's; Commonwealth Bank v Barker)
- 099. Structuring the analysis as IRAC and naming the authority for every rule the way the problem-question marking rewards
A term implied in fact — the loading-dock access problem
- +1Issue: is a term implied in fact into the hire agreement giving Vertex reasonable access to the loading dock for set-up and pack-down, even though the written contract is silent on it?
- +2Rule: a term is implied in fact into a formal written contract only if all five BP Refinery conditions are met (BP Refinery (Westernport) v Hastings Shire Council): (1) reasonable and equitable; (2) necessary to give business efficacy, so the contract would not work without it (The Moorcock); (3) so obvious it 'goes without saying' (officious bystander); (4) capable of clear expression; (5) it must not contradict any express term. The test is approved in Australia (Codelfa) and framed by what reasonable persons in the parties' position intended (Realestate.com.au v Hardingham).
- +1.5Application, limbs 1, 3-5: reasonable access is fair to both sides (limb 1); had a bystander asked at signing whether exhibitors get dock access to load in, both parties would obviously have said 'of course' (limb 3); the term is clearly expressible as 'reasonable access to the loading dock during set-up and pack-down' (limb 4); and there is no express clause excluding service-area access, so nothing is contradicted (limb 5).
- +2.5Application, limb 2 (the live limb) with both sides: because there is no other way to bring equipment in, the hire is useless for an exhibition without dock access, so the term is necessary for business efficacy, not merely an improvement (The Moorcock). Counter-argument: Riverside will say the term is only reasonable, not necessary, and that goods could be hand-carried through the front doors; if that alternative is genuinely feasible the contract would 'work' without the term and limb 2 fails (Codelfa).
- +1Conclusion: on the stated facts (no alternative access) all five limbs are satisfied, so a term granting reasonable loading-dock access is likely implied in fact and Riverside's refusal is a breach — but the result turns on limb 2, so if a practical alternative means of access exists the term may not be necessary and would not be implied.
Key terms
- Implied term
- A term not written or spoken but read into the contract by a court, either in fact (this contract), in law (a class of contract), or by custom (trade usage).
- Implied in fact
- A term implied to reflect the presumed intention of these particular parties. For a formal written contract it must pass the BP Refinery five-point test (BP Refinery (Westernport) v Hastings Shire Council).
- BP Refinery five-point test
- For a term implied in fact into a formal contract, all five must hold: reasonable and equitable; necessary for business efficacy; so obvious it goes without saying; capable of clear expression; and not contradicting any express term.
- Business efficacy
- Limb 2 of the test: a term is implied only so far as necessary to make the contract work, not to improve it. If the contract functions as written, nothing is implied (The Moorcock; Codelfa).
- Officious bystander
- Limb 3 of the test: a term is implied only if it is so obvious that, had a bystander suggested it at the time of contracting, both parties would have said 'of course'.
- Implied in law
- A term read into every contract of a particular class as a matter of policy, on a test of necessity, regardless of these parties' intention (Liverpool City Council v Irwin; the High Court is cautious — Breen v Williams).
- Implied by custom
- A term drawn from an established trade usage that is notorious, certain and reasonable and not contrary to the express terms of the contract (Con-Stan Industries).
- Duty of good faith
- An implied obligation to act honestly and not to use contractual powers to destroy the other party's benefit. Not settled at High Court level (Commonwealth Bank v Barker), but recognised by intermediate appellate courts, especially for discretionary powers (Renard; Burger King v Hungry Jack's).
Implied Terms FAQ
When will a court imply a term just because it seems fair?
It will not. Fairness or reasonableness is not the test for an implied term in fact — the term must be necessary to give the contract business efficacy, meaning the contract would not work properly without it (The Moorcock; Codelfa). A contract that functions perfectly well as written gets no implied term, however sensible the proposed addition. And an implied term can never contradict an express term, which is a clean knockout under limb 5 of the BP Refinery test.
Is there a general duty to perform a contract in good faith in Australia?
It is not settled. The High Court has not endorsed a freestanding general duty of good faith and declined to imply a term of mutual trust and confidence in employment (Commonwealth Bank v Barker), leaving the question open. Intermediate appellate courts have, however, recognised good faith in specific settings — most defensibly where one party exercises a discretionary power and appears to use it to defeat the other side's benefit (Renard Constructions; Burger King v Hungry Jack's). Argue it narrowly and note the sceptical line (Esso) as your counter-argument.
Can AI help me with Implied Terms in LAW5002?
Yes, as a study aid. An AI tutor like Sia can explain the three routes step by step, walk you through the BP Refinery five-point test on practice IRAC problems, and help you see why a term is necessary rather than merely reasonable — so you understand the reasoning. It will not write your assignment or sit your exam for you, and it cannot promise a mark or a pass. Note that the most recent past exam was open book but did not permit generative AI in the exam room, so use AI to build understanding beforehand and confirm the current rules on Moodle.
Studying with AI? Sia — free AI law tutor works through LAW5002 step by step.
Exam move
Treat Implied Terms as the final stage of a terms problem: only after incorporation (which words got in) and construction (what they mean) do you ask whether an unwritten term binds. Lock the three routes first — in fact, in law, by custom — and memorise the BP Refinery five-point test cold, because most problems are in-fact problems. Drill the distinction between necessary and merely reasonable, since that is where marks are won and lost (The Moorcock; Codelfa), and always scan the express terms for a contradiction that would sink the whole argument under limb 5. Keep in law separate (necessity for a class of contract, Liverpool City Council v Irwin, with the High Court's caution in Breen v Williams) and reserve good faith for discretionary-power fact patterns, arguing it narrowly and flagging that the High Court has left it open (Commonwealth Bank v Barker). Practise by taking a short scenario, running each route through IRAC, naming the case for every rule, and arguing both sides before you conclude, because the problem-question marking rewards identifying the source of each principle and considering counter-arguments.
