The distinction between implied and inferred terms was covered in our 2018 [PDF] and 2021 Updates. Put simply:
It is unclear whether this distinction has survived the judgment of the High Court in Realestate.com.au Pty Ltd v Hardingham 1 . That case was heard by five judges, two of whom (Justices Edelman and Steward ) proposed a very different method for categorising terms of a contract. Their judgment divided contracts into:
This categorisation would appear to leave no room for terms that might be inferred from conduct, but do not satisfy the criteria in BP Refinery. 2 Their application of BP Refinery to 'informal' contracts was also arguably inconsistent with earlier High Court authority, although in substance there may be no difference if BP Refinery is not applied rigidly.
Adopting this approach, Justices Edelman and Steward determined the appeal by deciding what term should be implied into a licence agreement.
The other joint judgment, of Chief Justice Kiefel and Justice Gageler, in some respects adopted a more traditional approach. They inferred the terms of a licence agreement from the conduct of the parties and the surrounding circumstances, and held that there was therefore no need to consider whether a term should be implied (and therefore did not consider the test in BP Refinery). There are some passages, however, which appear to question the utility of focusing on whether terms were inferred or implied. 3
Justice Gordon J delivered a separate judgment, which disagreed with the analysis of contract terms proposed by Justices Edelman and Steward. Like Chief Justice Kiefel and Justice Gageler, she held that the terms of the licence agreement could be inferred from the words and conduct of the parties, in light of what they knew. She may, however, also have had some reservations about the utility of the distinction between inferred and implied terms. 4
In conclusion, the High Court has narrowly confirmed the ability to infer terms of a contract from the parties' conduct and surrounding circumstances, but has created some uncertainty about the utility of the distinction between implied and inferred terms, and as to how and when the test in BP Refinery should be applied.
An example of the distinction between inferred and implied terms is the decision of the Victorian Court of Appeal in Bai v Lightspeed Finance Pty Ltd 5 , in which a court inferred an agreement to terminate a deed of loan following the entry by related parties into a new funder agreement. Although the court in this case did use the language of an 'implied agreement' to terminate, it was inferring such an agreement, rather than purporting to imply terms in accordance with BP Refinery.
The test in BP Refinery applies to the implication of terms in fact, rather than in law. The long debate in Australia as to whether there should be an implied contractual obligation of good faith (and whether such an implication should be in law or in fact) shows no signs of being resolved. The issue was considered by the Queensland Court of Appeal in QNI Resources Pty Ltd & Anor v North Queensland Pipeline No 1 Pty Ltd & Anor 6 . The judgment of Justice Kelly (with whom the other two judges agreed) contains a useful overview of the authorities on good faith, and on the distinction between terms implied in fact and in law. The court declined to imply a duty of good faith on either basis.
An example of a term implied in law is an implied term that contractual powers be exercised within a reasonable time. As Justice Dixon stated in Reid v Moreland Timber Co Pty Ltd 7 'an implication of a reasonable time when none is expressly limited is, in general, to be made unless there are indications to the contrary'.
This passage was cited by the Western Australian Court of Appeal in City of Wanneroo v Tah Land Pty Ltd 8 , in finding in favour of such an implied term limiting the power of the city to require Tah Land to perform certain work.
An example of a potentially more 'flexible' approach to implying terms into informal contracts is the NSW Court of Appeal judgment in Woodhouse v Woodhouse 9 . The case concerned an oral loan agreement. The court noted the possibility of implying a term that a loan was not repayable without notice (which was significant for determining when the limitation period commenced), on the basis that it was arguably 'necessary for business efficacy'. This might suggest support for the abbreviated test for implying terms into oral contracts, rather than applying all of the BP Refinery criteria although perhaps not too much weight should be given to these comments, as they were obiter.
Conversely, the decision of the NSW Court of Appeal in Hobhouse v Macarthur-Onslow 10 is an example of a court applying BP Refinery in declining to imply a term. The court found – contrary to the trial judge – that the term should not be implied because it was not 'necessary', not 'so obvious that it goes without saying' and would be inconsistent with an express term.
Formation of contract – effect of subsequent agreements on initial agreement – implied termination.
In this case, the court considered whether an initial loan agreement between a lender and borrower was superseded by a subsequent funder agreement to which the lender was not a party.
The court held that although the funder agreement did not terminate the initial loan agreement, it was a relevant part of the factual matrix in which the question of implied termination was to be considered. Ultimately, the inconsistency between the two agreements, taken alongside the conduct of the party, established an implied agreement to terminate the initial loan agreement.
The case is significant, as it demonstrates how subsequent agreements can impact an initial agreement, even where the subsequent agreement involves parties who are not parties to the initial agreement.
Under a deed of loan, Mr Junping Bai lent $1,500,000 to Lightspeed Finance Pty Ltd. According to the deed of loan, the funds were advanced for the express purpose of being on-let to 462 Victoria Parade Pty Ltd.
Eventually, both Mr Bai and Lightspeed Finance sought to depart from the terms of the deed of loan. Mr Bai wished to alter the arrangement so that his company, Haide Holdings Ltd, was the lender. Lightspeed wished to ensure that it was no longer the borrower but was, rather, a 'mortgage manager' that would act as an intermediary to procure and manage loans made by Haide to third parties. Accordingly, Haide and Lightspeed entered into a separate 'Funder Agreement' to reflect those changes – Haide was listed as the lender, and Lightspeed was listed as the loan facilitator and manager.
While the funder agreement substantially related to future loans, in a schedule to the agreement it also referred to 'Settled Loans', including reference to the funds advanced to Victoria Parade under the original deed of loan. Victoria Parade eventually defaulted on its repayment obligations, and Mr Lai brought proceedings against Lightspeed to recover the principal sum lent under the deed of loan and any outstanding interest repayments. The question that arose in the proceedings was whether, following entry into the funder agreement, the deed of loan had been impliedly terminated such that Lightspeed was no longer liable as a borrower under that deed.
The primary judge ruled in Lightspeed's favour, holding that the funder agreement superseded the deed of loan, and that the deed of loan had been impliedly terminated. The Victorian Court of Appeal unanimously upheld that decision.
The court began by noting that, in resolving the issue on appeal, it was not concerned with the subjective intentions of the parties. Rather, it was necessary to consider the 'outward manifestations of those intentions'. What was 'critical' was what each party, by its words or conduct, would have led a reasonable person in the position of the other party to believe.
The court noted that the funder agreement itself could not have any direct effect on the deed of loan. Haide and Lightspeed could not contract with each other to terminate an agreement that was between Lightspeed and Mr Bai. Nonetheless, the inconsistency between the funder agreement and the deed of loan was relevant to the extent that it formed part of the 'factual matrix' relevant to the question of whether Mr Bai and Lightspeed had separately agreed to terminate the deed of loan.
So far as inconsistency between the funder agreement and the deed of loan was concerned, the court focused on the fact that the funder agreement sought to regulate 'Settled Loans'. It found that the definition of 'Settled Loans' in the funder agreement embraced the original loan on-lent to Victoria Parade under the deed of loan. It followed that both the funder agreement and the deed of loan regulated that loan. However, they did so in an inconsistent manner. Notably, the interest rate payable by Victoria Parade under the funder agreement was 15% per annum, rather than the rate of 24% imposed by the deed of loan on Lightspeed. In the court's view, the objective bystander would not consider the interest remitted to Lightspeed by Victoria Parade could be 15% per annum while Lightspeed retained a concurrent obligation to pay interest at 24% under the deed of loan. Such an arrangement would not make commercial sense.
Importantly, the court noted that this inconsistency alone did not mean the deed of loan was unenforceable. Instead, it was necessary to demonstrate that Mr Bai also agreed to the termination of the deed of loan. However, the court ultimately found that his conduct evinced an agreement to the termination of the deed of loan. In reaching that conclusion, the court noted that Mr Bai was aware of the terms of the funder agreement, and the material inconsistencies between the funder agreement and the deed of loan. Additionally, various exchanges between the parties demonstrated an intention between them for the funder agreement to ensure that Lightspeed would no longer be a borrower. In those circumstances, it was evident that Mr Bai, through his conduct, had agreed to the termination of the deed of loan and thus the appeal was dismissed.
Implied terms regarding time for performance of contracts.
In this case, the Western Australian Court of Appeal (Justices Quinlan, Buss and Beech) considered, among other issues, whether there existed an implied term that limited the ability to call upon performance of an obligation under a contract within a reasonable time frame.
The court held that, on the basis of the parties' conduct and the objective unlikelihood of agreeing to an unlimited time frame, there existed an implied term regarding the reasonable time frame.
This case is significant in affirming the principles the court will look to when deciding whether to imply a term limiting the period in which performance of a contractual obligation can be required.
Facts & JudgementIn 1992, the City of Wanneroo and Tah Land Pty Ltd entered into a deed relating to the proposed development of an area of land, which Tah Land owned, on Wanneroo Road, Landsdale, for a variety of commercial purposes. Two relevant terms of the deed were that Tah Land would take steps to have the land rezoned and subdivided, and would transfer to the council the title to 1.5 hectares, to be used as a Community Purposes Site, before the commencement of trading of any business on the land.
In 1996, the City and Tah Land exchanged correspondence, which later became the basis of ground 2(a) of the appeal in this case. The City sent a letter to Tah Land, which included the following words:
The legal agreement should therefore be modified to achieve the following:
In response, Tah Land replied that it would modify the existing deed to incorporate those points 'on proper and reasonable terms and conditions consistent with the original Legal Agreement'. Later that year, Tah Land sent the City a draft deed that proposed performance could be called for within 12 months, to which the City provided no response.
The agreed effect between the parties of that correspondence was that Tah Land would be permitted to commence trading, even though it had not subdivided the Community Purposes Site and transferred it to the City.
In 2019, the City required Tah Land to perform its obligations, and prepare a plan of subdivision and transfer of the Community Purposes Site. Tah Land refused to perform its obligations.
The City submitted that the correspondence exchanged between the parties in 1996 created a complete and binding agreement, to the effect that the deed was varied so that the City had indefinite power to call for subdivision and transfer of the Community Purpose Site. The trial judge ruled that the power was not indefinite but, rather, that there was an implied term that the City could only call for performance within a reasonable time frame (of which 2019 was not).
The court upheld the trial judge's finding that the words and conduct of the parties did not reveal an objective agreement between the parties that the City could call upon Tah Land to perform its obligations at any time in the future.
It held that a reasonable person in the position of both the City and Tah Land would not conclude that the parties had to a right to call upon performance for an indefinite duration. The court placed particular emphasis on the below factors:
Due to the above factors, the court found that there was an implied term the City could only call upon performance within a reasonable time frame. As such, ground 2(a) of the appeal was rejected.
Implied terms: application of the BP Refinery test.
In this case, the Court of Appeal of NSW considered whether an implied term should be read into a deed that contained an option to purchase property.
The court held that the five conditions for implying terms in BP Refinery were not met, especially because the term implied at first instance by the Supreme Court would have contradicted an express term of the deed. Thus, the appeal was allowed.
This case is significant because it confirmed that terms will not be implied in contracts where existing provisions are capable of operation without implication, even if those provisions are not operable in every circumstance.
Under a deed, Mr Macarthur-Onslow had a first call option to purchase an apartment at the 'midpoint market value' price determined in accordance with the procedure in cl 8.1(d) of the deed. This option would expire 60 days after the deed was executed. If Macarthur-Onslow failed to exercise his option before it expired, Ms Hobhouse had a second call option to purchase the apartment.
Clause 8.1(d) authorised Mr Rogers, an accountant, to obtain two current market valuations of the apartment and, subsequently, to determine a midpoint valuation. Clause 12.2(d) provided that any option was to be exercised by serving a written notice of exercise of option, two signed contracts for sale, and a cheque for the deposit.
After the deed was executed, Rogers sought valuations of the apartment from two valuers to determine the 'midpoint valuation'. However, only one valuer returned a valuation of the apartment, at $4,250,000-$4,500,000, within 60 days of the deed being made and Macarthur-Onslow's option expired. Nonetheless, Macarthur-Onslow purported to exercise the option by submitting a notice of exercise, two signed contracts, and a cheque for $437,500 before the end of the 60 th day of the deed. This amount constituted 10% of the midpoint of the range given by the one valuer.
At first instance, Justice Kunc considered that the test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 for implying a contractual term was satisfied. His Honour implied the words 'and if the price has been determined in accordance with this Deed' into the relevant clause:
Any such option…is to be exercised by service of written notice of exercise of option…signed by the Grantee, and if the price has been determined in accordance with this Deed, together with two copies of the Contract for the purchase of such property duly executed by the Grantee and cheque for the deposit payable…
The effect of the implied text was that if the midpoint market value had not been determined in accordance with the deed, then Macarthur-Onslow would only need to submit a notice, and not a cheque for the deposit or two signed contracts . Accordingly, Justice Kunc held that Macarthur-Onslow had validly exercised his option.
Justice Macfarlan (Justices Ward and White agreeing) did not consider that the test in BP Refinery for implying a term was satisfied. The test for implying a term in that case was summarised as such:
The court regarded the deed in this case to be detailed and comprehensive. Its provisions relating to Macarthur-Onslow's option 'were not so unworkable such that it was necessary to imply a term to give them business efficacy'. Rogers' task to obtain the midpoint of two valuations of the apartment was 'by no means impossible' and there were plenty of options open to him to ensure that two valuations were obtained in time. For instance, Rogers could have chosen any valuer, and the valuations did not need to take a form that would have delayed valuation. If a valuer were delayed, Rogers could have approached another within the 60-day period.
While the option was not workable in the particular circumstances of this case, there were many instances in which it would not be unworkable. Justice Macfarlan considered it unnecessary that the option be able to be exercised in every circumstance. Rather, it was sufficient that the option 'was capable of being exercised in many foreseeable circumstances'. Therefore, it was not necessary to imply a term to give business efficacy to the deed (condition 2 of BP Refinery). In the present case, the implication in essence was only necessary to ensure the contract operated in Macarthur-Onslow's favour.
Further, Justice Macfarlan considered that the term implied by Justice Kunc was not so obvious that 'it [went] without saying' (condition 3 of BP Refinery), and that a reasonable bystander might have implied a different term. His Honour also found that the implied term was inconsistent with the contract's express terms (condition 5 of BP Refinery), as it changed the manner in which the option could be exercised by altering the circumstances in which a deposit was required.
The court also dealt briefly with the question of relief against forfeiture, which Macarthur-Onslow raised in the alternative. Justice Macfarlan found that this was not a case in which equity would relieve against Hobhouse's reliance on the deed because Hobhouse did not act unconscionably, nor was Macarthur-Onslow's inability to exercise his option an 'accident'.
The latest on penalties and the duty of good faith.
In this case, the Queensland Court of Appeal considered whether:
The court held that the joint venture participants were directly liable to pay the charges under the contract. Those charges legitimately protected the interests of the promisee under the contract, and therefore could not be construed as unenforceable penalties. Additionally, in the absence of High Court authority, the court refused to recognise a universally applicable implied obligation of good faith in commercial contracts. The court also refused to imply an obligation to act in good faith in fact or law, in light of the circumstances of this case.
The decision reinforces the absence of a universally implied obligation of good faith into commercial contracts in all Australian jurisdictions. If parties wish to rely on an obligation of good faith, they may need to demonstrate why such an implied obligation is necessary to the operation of the contract. Additionally, the decision reinforces recent case law concerning penalty clauses and the high threshold for a clause to be construed as a penalty.
North Queensland Pipeline No 1 Pty Ltd and North Queensland Pipeline No 2 Pty Ltd (the pipeliners) formed an unincorporated joint venture to design, construct, operate and maintain a gas pipeline. On 12 May 2005, the pipeliners executed a contract for the transportation of gas on the pipeline with Queensland Nickel Pty Ltd, in its capacity as the manager of (and as an agent on behalf of) the participants in another joint venture – QNI Resources Pty Ltd (QNR) and QNI Metals Pty Ltd (QNM). The Queensland Nickel Joint venture required gas to operate its nickel refinery in Yabulu.
On 22 April 2016, Queensland Nickel went into liquidation. Subsequently, on 10 March 2016, it nominated that zero gas be received under the contract, as the nickel refinery it operated had been shut down. The dispute between the parties concerned invoices to QNR and QNM (the appellants) to pay a 'Firm Forward Shortfall Charge' and 'Imbalance Charge' under the contract.
The firm forward shortfall charge was a payment to the pipeliners for satisfying their obligation to transport the gas under the contract. The pipeliners were required to receive a nominated quantity of gas on any day up to the 'Maximum Daily Quantity' (the MDQ) specified in the contract. If the pipeliners delivered between 90 to 100% of the MDQ, they would be paid a firm forward charge that was calculated by reference to the actual quantity of gas supplied. However, if the pipeliners delivered less than 90% of the MDQ, they would be paid both a firm forward charge and a firm forward shortfall charge. The firm forward shortfall charge would be calculated by reference to the amount by which the delivery fell short of 90% of the MDQ. In substance, its effect was to ensure that the pipeliners received a minimum payment as if they had delivered 90% of the MDQ.
The imbalance charge arose where more or less gas was delivered to a delivery point by the pipeliners than was received by a pipeline at a receipt point. As pipelines require a base quantity of gas to guarantee necessary for the gas to flow along the pipeline, the balance of gas in pipeline is an important consideration. Under the contract, if there was an imbalance of gas, the pipeliners were entitled to charge an amount that was the product of a pre-determined formula.
At first instance, the appellants were held to be liable to pay both the firm forward shortfall charge and the imbalance charge. On appeal, the appellants sought to argue the following:
The court unanimously dismissed the appeal, with Justice Kelly delivering the reasons for judgment. On the first ground of appeal, his Honour noted that the contract imposed various obligations on 'QNI'. QNI was defined in the contract as referring to Queensland Nickel, QNR and QNM. Additionally, the contract included a clause that specifically stated all liability to pay an amount of money under the contract (including liability to pay for a failure to perform an integral 'QNI obligation') was to be borne severally by the appellants in specified proportions. His Honour also noted that the contract imposed obligations on the appellants to remain creditworthy at all times, and that the pipeliners were granted a right under the contract to terminate if the appellants failed to pay on a due date. Read together, the effect of these provisions was to directly impose obligations on the appellants to pay certain amounts of money under the contract.
On the second ground of appeal, Justice Kelly found that the imbalance charges were not penalties. His Honour noted that a penalty clause is a collateral stipulation that acts to secure a primary stipulation. Such a clause would be construed as a penalty if it required the payment of an amount that is 'out of all proportion' to the interests said to be protected under the primary stipulation.
In arguing that the clause entitling the pipeliners to an imbalance charge was a penalty, the appellants focused on the fact that an imbalance charge could be incurred even if there was a positive imbalance of gas in the pipeline. However, the unchallenged finding of the primary judge was that a positive imbalance could reduce or eliminate the pipeline's capacity to store gas in the pipeline. That in turn could impact the Pipeliners' ability to serve additional users of the pipeline. The appellants submitted that such a loss was entirely theoretical because at the time of contracting there was no evidence of any anticipated additional users of the pipeline. However, Justice Kelly rejected this submission, reasoning that any prospective loss under a contract at the time of contracting was necessarily theoretical or hypothetical. Contrary to the appellant's submissions, there was no evidence that the risk posed by a positive imbalance was unlikely to materialise at the time of the contracting. Therefore, no finding could be made the imbalance charge was out of all proportion to the Pipeliners' interest in avoiding a positive imbalance. Additionally, expert evidence accepted by the court suggested that gas imbalances could lead to the loss of customers and reputational issues for the operators of pipelines. Such losses were difficult to estimate in advance, and his Honour stated that, in such circumstances, the penalty rule had no application. Instead, his Honour found that, properly construed, the imbalance charges were the product of the parties settling for themselves the contractual allocation of burdens and benefits regarding gas imbalances.
On the third ground of appeal, the appellants submitted that the contract included an implied obligation on the pipeliners to act in good faith to eliminate or correct the imbalance before enforcing the imbalance charge. This proposed wording of the obligation flowed from the fact that the contract empowered the pipeliners to choose to correct an imbalance before charging an imbalance charge.
The appellants contended that the primary judge should have recognised a generally applicable implied obligation of good faith in commercial contracts as a matter of law. However, in the absence of High Court authority in favour of a universal implied obligation of good faith in commercial contracts, Justice Kelly held that the Queensland Court of Appeal should proceed on the basis that such a term is not to be universally implied into all commercial contracts.
Despite the foregoing finding, his Honour noted that the appellants could still argue that an obligation of good faith could be implied within the particular circumstances of this case either in fact or law. An implication in law relied on the imputed intention of the parties, while an implication in fact required assessing the parties' actual intentions.
For such an implication to be drawn at law, Justice Kelly noted that the appellants needed to demonstrate that without an obligation of good faith the contract would be seriously undermined or deprived of its substance. However, in his Honour's view, the proposed implied obligation disturbed the proper functioning of the imbalance clause in the contract. In effect, it modified the pipeliners' discretionary power to either seek to correct the imbalance or impose the imbalance charge, by rending that power a power for the benefit of all parties. The proposed obligation of good faith would in substance subordinate the Pipeliners' interests in being able to charge for imbalances to the appellants' interest in not being liable to pay. His Honour noted that the usual content of implied good faith obligations was not to subordinate the interests of one party to the other's.
Finally, his Honour considered whether the obligation of good faith could be implied as a matter of fact. He noted that for an implication of fact to be drawn, the proposed term must be reasonable and equitable, necessary to give business efficacy to the contract, and so obvious that it 'goes without saying'. For similar reasons to those explained above, his Honour found that a good faith obligation was not necessary to give business efficacy to the contract. The power to correct imbalances was framed in expressly discretionary terms, and a good faith obligation would transform this discretionary power such that the word 'may' would be read as 'must'. Accordingly, the actual intention of the parties could not have been to constrain the Pipeliners' powers by an obligation of good faith.
Therefore, all three grounds of the appeal failed and the court dismissed the appeal with costs.
