Implied terms

In the 2020 Contract Law Update we summarised three appellate judgments that considered the implied duty to co-operate. That implied duty was again the subject of appellate consideration during 2021. In Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd¹ the Victorian Court of Appeal followed its judgment last year in Adaz Nominees Pty Ltd v Castleway Pty Ltd² and held that the duty to co-operate is an implied term of a contract, rather than an obligation arising by operation of law. One consequence of this conclusion is that the implied term 'must give way to the express terms of the contract'.

The court further noted the connection between this duty and the 'prevention principle', and held that the implication of the implied duty to co-operate must satisfy the requirements in BP Refinery³ – although those requirements are arguably only applicable to terms implied in fact, rather than terms implied in law (such as the implied duty to co-operate).⁴

The court also emphasised that:

• the content of the implied duty to co-operate is 'to afford the other party the benefit of what he or she has contracted for, not a duty to act generally in the other party’s best interests'; and
• the prevention principle applies to conduct that 'hinders or prevents' the fulfilment of a contractual promise – it does not need to make performance impossible.

On the facts of the case, the court found that there was no breach of the prevention principle or the implied duty of co-operation.

The application of BP Refinery to oral (or partly oral) contracts was considered by the Full Court of the Federal Court in Hardingham v RP Data Pty Limited⁵. The court followed earlier authority that emphasised the BP Refinery criteria should be considered, but are not decisive, when implying terms into oral contracts. However, it will usually still be essential that the proposed implied terms be 'necessary' for the reasonable operation of the contract and be 'so obvious that it goes without saying'. The majority held that, applying these tests, the proposed term (allowing sublicensing of copyright) should not be inferred.

The Full Court also noted the distinction between inferred terms, which a court concludes were agreed between the parties (which might be shown, for example, by their course of conduct) and implied terms, which were not, in fact, agreed, but would have been agreed had the parties turned their minds to it.⁶ Notwithstanding this logical distinction, the court noted that it is not always easy to differentiate between inferred and implied terms.

Implying and inferring terms into oral informal commercial agreements

In this case, the Full Court of the Federal Court of Australia considered whether intellectual property rights created under informal oral contracts were infringed, and whether a licence was created through implied or inferred terms that extended to the first respondent's use of intellectual property under the agreements, therefore making the agreements subject to the first respondent's own terms and conditions permitting it to sub-licence the intellectual property to third parties.

The court held by a 2-1 majority (Justices Greenwood and Rares, Justice Jackson dissenting) that the first respondent had infringed the appellant's copyright. The court held that there were no inferred or implied terms that the agreements created a licence subject to the first respondent's terms and conditions.

This case is significant because it affirms that:

• While there is some degree of overlap with the principles governing inferred and implied terms, there are important differences;⁷
• When inferring or implying a term into an informal oral commercial agreement, the term must be:
  • reasonable and equitable to both parties and so obvious it goes without saying;⁸ and
  • necessary for the reasonable or effective operation of the contract in the circumstances of the case;⁹
• An oral commercial agreement must, notwithstanding the oral informal character of the contract, be construed and interpreted in seeking to imply a term in a manner it is presumed the parties would have agreed upon had they turned their mind to it; or that is 'taken' to have been the intention of the parties or the latent unexpressed intention of the parties. In those circumstances, the court will not lightly imply a term if it has adverse commercial consequences for one party to the contract.¹⁰

The judgment of Justice Greenwood at [82] provides a useful analysis of the principles to be applied in determining whether a term is to be implied in a contract.

Facts

The first appellant, James Kelland Hardingham (Hardingham), is a professional photographer. He is the sole director of the second appellant, Real Estate Marketing Australia Pty Ltd (REMA). REMA was commissioned by various real estate agencies to produce photographs and floor plans for marketing campaigns for the sale and leasing of properties. The agreement between REMA and the real estate agents did not expressly deal with the ownership or licensing of copyright. The agreement was oral – the agent would call Hardingham, who would agree to take photos and then send the invoice. The agreement provided the real estate agents with a licence to use the photographs and floor plans for marketing purposes, and REMA was aware that a key part of the agents' marketing and sales campaigns was to upload the commissioned photos to platforms such as realestate.com.au.

The various real estate agencies uploaded the photos and floor plans to realestate.com.au. The respondent, RP Data Pty Ltd (RP Data), operates the website www.corelogic.com.au. Through its website, subscribers can access a product that includes a number of reproductions of Hardingham’s photographs and floor plans. RP Data obtained the photographs and floor plans from the cross-respondent, realestate.com.au Pty Ltd (REA), a wholly owned subsidiary of REA Group Ltd. Hardingham and REMA commenced proceedings against RP Data in the Federal Court of Australia, alleging copyright infringement. Hardingham and REMA contended that they had not licensed RP Data to publish the photographs or floor plans.

Separately, when uploading property listings to realeastate.com.au, REA requires the agents to agree to its terms and conditions. These terms and conditions provide REA the right to license to third parties the right to use the materials (including the photographs and floorplans). REA provided this licence to RP Data.

The key issue, therefore, was whether REMA's agreements with the real estate agents was broad enough to authorise the use of the photos and floorplans by RP Data.

At first instance, the Federal Court of Australia held that it was an implied term of the oral informal agreements that the photographs and floor plans would be uploaded, as Hardingham 'must have known' that the materials would be uploaded to realestate.com.au. Accordingly, Hardingham and REMA authorised the agents, by way of implied licence, to upload the photographs and floor plans to the realestate.com.au platform and REA was able to sub-licence to RP Data in accordance with its terms and conditions.

Judgment

The Full Federal Court held by a 2-1 majority (Justices Greenwood and Rares) that REA and RP Data had infringed Hardingham's copyright in the photographs and floorplans, as the granting of the sub-licence to RP Data was not permitted through an implied or inferred term in the oral agreements.

Justices Greenwood and Rares, in separate decisions, relied on a number of authorities, including BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 and Byrne v Australian Airlines Limited (1995) 185 CLR 410, to conclude that it was not clear the implication that the agreement between Hardingham and the agents created a licence that extended to being subject to the REA terms and conditions was 'so obvious it goes without saying' or such an implication was necessary to give business efficacy to the agreement.¹¹

Justice Greenwood noted in relation to inferred terms that while there is some degree of overlap with the principles governing implication of terms, there were important differences.¹²

Justice Greenwood held that when considering whether to infer a term, the court must ask itself: 'What, if any, are the terms which can properly be inferred from all the circumstances as having been included in the contract as a matter of actual intention of the parties?'¹³.

Justice Greenwood contrasted inferred terms with implied terms. In the case of implication, the court seeks to adopt a presumed construct reflecting imputed intention, on the assumption that had the parties addressed the relevant matter, they would have agreed it should be part of the contract.¹⁴

In resolving the appeal, the majority acknowledged that the criteria set out in BP Refinery is a necessary starting point when considering whether a term is to be implied; however, it cautioned against a rigid or formulaic application of the five criteria set out in that judgment. Both Justices Greenwood and Rares relied on the High Court reasoning in Byrne as their principal authority to state the most important factors when considering an implied term, especially in an informal contract of this nature, was:

• that the term is so obvious it goes without saying;
• that the implication of the term must be necessary for the reasonable or effective operation of the contract in the circumstances of the case; and
• that the implied term does not operate in a partisan matter contrary to the interests of one party.¹⁵

Justice Greenwood held that the parties having an understanding that the agencies would engage with REA and accept their terms and conditions was not a sufficient basis for inferring or implying a term in the contract.¹⁶ The alleged REA agreement that was relied upon by the first respondent, 'virtually expropriate[s] the ownership of the copyright' in Hardingham's work and a licence with such a result must not be inferred lightly. Justice Rares held that, given the informality of the oral agreements, the implied term was 'not necessary for the reasonable or effective operation of those contracts'.¹⁷