Contract Law Update 2022: Implied terms, inferred terms and good faith

Contract law update 2022

The distinction between implied and inferred terms was covered in our 2018 [PDF] and 2021 Updates. Put simply:

an inferred term is a term that a court infers was agreed between the parties, even if it was not expressly agreed in writing or in words (the inference is usually drawn from the parties' conduct); and
an implied term is one a court decides would have been agreed by the parties, had they turned their minds to it (eg because it was necessary to give business efficacy to the contract).

It is unclear whether this distinction has survived the judgment of the High Court in Realestate.com.au Pty Ltd v Hardingham¹. 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:

express terms, which they limited to terms that were expressly agreed by words or in writing; and
implied terms, to be determined in accordance with the test in BP Refinery, albeit not rigidly applied.

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 Ltd⁵, 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 & Anor⁶. 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 Ltd⁷ '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 Ltd⁸, 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 Woodhouse⁹. 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-Onslow¹⁰ 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.

In 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:

1. A time extension for the identification, zoning, subdivision and transfer of the community purposes site on the basis that the City is able to require these matters to be carried out at any time in the future if it requires.

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:

the subject matter of the obligation was the transfer of an area of land, for which courts are reluctant to construe obligations giving rise to indefinite rights of transfer;
the initial obligations in the deed (before they were varied) were limited by time, and were essential terms of the deed;
it was the City that was requesting Tah Land defer performance of that obligation, rather than Tah Land itself requesting delay of its obligations of performance; and
Tah Land's agreement to that deferral was expressed to be 'on proper and reasonable terms and conditions consistent with' the deed.

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 term must be reasonable and equitable;
The term must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
The term must be so obvious that 'it goes without saying';
The term must be capable of clear expression; and
The term must not contradict any express term of the contract.

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 participants in a joint venture could be found liable to pay certain charges under a contract executed by the joint venture manager;
those charges could be construed as unenforceable penalty clauses; and
an obligation to act in good faith could be implied into the contract.

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 contract did not directly impose liability onto them to pay the charges to the pipeliners;
the imbalance charges were unenforceable penalty clauses; and
in claiming the imbalance charges from the appellants, the pipeliners had breached an implied obligation to act in good faith.

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.

Categorisation of contractual terms – inferred and implied terms.

In this case, the High Court considered what terms might be inferred or implied into an informal contract.

The court held that the applicants did not infringe the licence granted by a real estate photographer, by continuing to use the works uploaded to their websites after the relevant properties were sold or leased, in circumstances where the photographer knew his works would be uploaded by the original licensees to another website.

The majority of the High Court was willing to infer terms into an informal contract, but different approaches were taken to the inference or implication of terms.

The following background facts were not in dispute:

The copyright in the works (which were photographs and floor plans) was held by the respondents, a real estate photographer, Mr Hardingham, and his company Real Estate Marketing Australia Pty Ltd (referred to collectively as Hardingham).
Hardingham was commissioned by real estate agencies to provide the works to assist the agencies in selling and leasing properties.
Hardingham did not have written contracts with their clients.
Hardingham knew that their clients would upload their works to REA in order to advertise the properties for sale or lease.
RP Data had an agreement with REA by which it used works published on REA.
REA and RP Data continued to reproduce the copyrighted works on their websites after the sale or lease of the properties.

The real estate agencies had entered into a subscription agreement with REA, by which they agreed to the following express licence:

1. Your acknowledgements

You acknowledged and agree that at all times during the Term of this Agreement:

(a) in consideration for us granting you a right to upload listings to the Platform and other services we provide, you grant us an irrevocable, perpetual, world-wide, royalty free licence to publish, copy, licence to other persons, use, adapt for any purpose related to our business any content you provide to us during the Term, and this licence survives termination of this Agreement by you or us;

The question was whether REA and RP Data's use of the works was within the licence granted by Hardingham to the real estate agents who commissioned the works for their use in selling the properties, including on REA. Hardingham claimed that, although they did not have formal contracts with the real estate agents, the licence they granted was limited and came to an end once the relevant property was sold – ie it was not a licence in perpetuity.

At first instance, the primary judge found that Hardingham permitted (ie licensed) the real estate agencies to use their works on REA, and knew or assumed that the website was permitted to use the works after the relevant advertising campaigns had ended. The sub-licence to RP Data did not go beyond the licence that could be inferred from Hardingham's conduct and implied into the contracts with the agents.

On appeal, the majority of the Full Court of the Federal Court concluded that the informal contracts contained an express term that a licence to use the works and sub-licence was limited to the campaign to sell or lease the properties. The court made orders restraining the websites from using the works.

The High Court confirmed that when construing the terms of a contract, it is an objective view of what a reasonable person would conclude based on the words and conduct (or lack thereof) of the parties. A reasonable person would conclude that the purpose of the real estate agencies commissioning the works was in part so that they could be uploaded to REA, which required the agencies to provide it with a licence to use those uploaded works. By their conduct, Hardingham permitted the use of their works by the websites after the marketing campaigns had finished.

Justice Gordon explicitly criticised the approach of the Full Court in taking the following steps:

referring to the actual intention of the parties, when the terms of a contract must be identified objectively;
applying a 'rigid taxonomy' of express, implied and inferred terms, when the first task is to identify what a reasonable person would conclude were the terms of the bargain based on the parties' conduct and context; and
conflating inferred and implied terms

In their joint judgment, Chief Justice Kiefel and Justice Gageler noted that Hardingham's failure to object led the real estate agencies to the view that they knew and accepted the commercial reality they would need to advertise on REA and accept the terms of the website. Justice Gordon's view was that the contract included a term that the real estate agencies could sub-lisence the use of the works to other parties even after the properties had been sold or leased.

Justices Edelman and Steward took a different approach, and decided the case on the basis of implied, rather than inferred, terms. They found that it was natural and obvious the real estate agencies were going to use the services of REA and were going to accept its terms and conditions, and implied a term accordingly.

The High Court took slightly differing views on the application of the principles.

Differentiation between 'inferred' and 'implied' terms

Chief Justice Kiefel and Justice Gageler drew a distinction between what can be inferred from the circumstances and what may be implied. In this case, they noted that Hardingham did not raise any objections to the commercial reality that the real estate agencies would accept REA's terms. An agreement and the terms of the agreement could be inferred from their acts and conduct (or their absence). In these circumstances, it is not necessary to consider whether to imply a term into the sub-licence to REA limiting their use of the copyrighted works.

Justice Gordon stated that the definitional delineation between inferred and implied terms is not easy to draw, and potentially unproductive if it would distract attention from the proper inquiry as to the terms of the bargain between the parties.

Justices Edelman and Steward asserted that there is no third category of 'inferred terms', as contract terms are either express or implied, although they noted that there is a fine line between an implication in an express term and an implied term. Although there is no category of 'inferred terms', inferences can be made in the process of discerning the existence of express terms or the identification of implied terms. A term 'implied' by a court already exists in a contract (although not expressly), which can be understood by drawing inferences.

Application of principles to informal and formal contracts

Justices Edelman and Steward took the view that, while noting context will affect the application of contractual rules, there is no such thing as a category of 'informal' contracts that have different rules from those governing all other contracts. Justice Gordon, on the other hand, noted that there are separate authorities distinguishing between the implication of terms in formal and informal contracts, and that courts' approaches will differ when considering an informal contract.

While Chief Justice Kiefel and Justice Gageler did not refer to 'informal' contracts, their reasons noted that where the terms of an agreement have not been articulated, they must be ascertained by reference to the parties' words and conduct.

Are loans without a fixed term repayable without notice?

In this case, the NSW Court of Appeal considered whether an oral loan agreement between a mother and son was within the limitation period for enforcing the loan.

The court held that the loan was for a fixed term that placed the action for its recovery well within the limitation period. However, the appellant had submitted in the alternative that the loan was payable on demand, to which the court commented it was arguable that, had the fixed term of the loan not existed, it would be necessary for business efficacy to imply a term that the cause of action to recover the loan would not accrue until some sort of reasonable notice was given to the debtor.

The commentary is significant because it suggests a potential widening of the circumstances where the court will imply a term that requires notice to be given to a debtor before a cause of action to recover the debt accrues. This is important both to the proper construction of loan agreements and to calculating the limitation periods of such loans.

In dividing a family estate, a mother transferred land and other assets to her adult son for him to continue running the family farming business. As part of this transfer, the son agreed to 'take on' the overdraft liability of the farming business's trading trust. To cover the liability, the mother loaned $267,237 to the son, which she alleged was to be repaid after five years at 8% annual interest.

Eventually, the mother brought proceedings seeking recovery of the principal and interest on the loan. At first instance, the Supreme Court dismissed the claim because, on balance, it was not persuaded that the loan had been entered into on the terms alleged by the mother – particularly, it had not been established that the loan was repayable after five years. As a consequence, the mother's claim was outside the limitation period and was statute barred.

The mother appealed to the Court of Appeal, asserting that, on a correct construction, the loan had a fixed term of five years, but that, alternatively, the loan was payable on demand (and therefore the limitation period under the Limitation Act 1969 (NSW) had been extended because partial repayments had been made).

The Court of Appeal found for the mother, affirming that the obligation to repay the loan arose after five years and that, accordingly, the debt was still within the limitation period and was enforceable (per Justice Meagher; Chief Justice Bell and Justice Mitchelmore agreeing).

However, there was significant obiter from the court that, had the loan not been for a fixed term, it did not follow that it was payable on demand.

The general common law position is that a simple loan contract that does not provide for the time of repayment is understood to create an obligation to repay immediately – ie on demand. Parties who wish to avoid this obligation arising must contract out of it: Ogilvie v Adams [1981] VR 1041,1043.

In this case, the court considered it 'certainly an arguable position' that it could be necessary for business efficacy to imply a term that the mother's loan was not repayable without notice, given its circumstances and purpose . Had such a term been implied, the limitation period on the mother's claim would not have commenced until a demand for the debt was made.

The court was supported in this dictum by the Supreme Court of Victoria's decision VL Finance Pty Ltd v Legudi [2003] VSC 57, which found that, in certain circumstances, implying a term that a loan would not be repayable without notice to the debtor accords with the principle established in Ogilvie.

The court's comments in this case suggest a widening of circumstances where it may rely on business efficacy to imply a notice requirement for a loan (with no due date) to be payable. This widening is suggested because material differences exist between the scenarios contemplated in VL Finance (being a written loan agreement clearly implying the loan would not be payable, and a dispute where shareholders deposited surplus capital funds into a company) and the facts of the present case.

Footnotes

[2022] HCA 39.
(1) [the implication] must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
See [21] – [22].
At [50], although this passage in her judgment may have been primarily intended to deal with the classification proposed by Justices Edelman and Steward.
[2022] VSCA 242.
[2022] QCA 169.
(1946) 73 CLR 1 at 13.
[2022] WASCA 53.
[2022] NSWCA 240.
[2022] NSWCA 158.

Contract law update 2022: implied terms, inferred terms and good faith

Can we still infer terms, and how do we imply them?

Bai v Lightspeed Finance Pty Ltd [2022] VSCA 242

City of Wanneroo v Tah Land Pty Ltd [2022] WASCA 53

Hobhouse v Macarthur-Onslow [2022] NSWCA 158

QNI Resources Pty Ltd & Anor v North Queensland Pipelines No 1 Pty Ltd & Anor [2022] QCA 169

REA Pty Ltd v Hardingham [2022] HCA 39

Woodhouse v Woodhouse [2022] NSWCA 240

Footnotes