Implied Terms in Contract Law

On 14 December 2022, the High Court handed down the judgment in the matter of Realestate.com.au Pty Ltd v Hardingham, RP Data Pty Limited v Hardingham [2022] HCA 39 (hereafter “Realestate.com.au v Hardingham”), revisiting the law of implied terms in contract law.

• Implied Terms – an example

What do we mean by “implied terms”? Some contracts are comprehensive, expressly stating all the terms governing the contract. Many contracts, however, comprise of only a limited number of express terms, with the balance being “implied”.

Think of when you order a cappuccino. Ordinarily, you will say words to the effect of “one cappuccino please”. You may further specify the size you want, although sometimes even that will be implied.

In this example, there are numerous implied terms. For example, it is implied, unless you have requested to the contrary:

1. the cappuccino will be hot, and not cold;
2. actual coffee beans will be used to make it;
3. the milk will be fresh;
4. the milk will be that of a cow, and not of, say, a goat;
5. the cappuccino will be provided to you within a reasonable time frame, and not, say, 3 days later. 

These are all implied. If you went up to the counter and started verbally listing all the terms to the contract, you may receive strange looks from the staff or other patrons.

There are also terms implied by statute. For example, under the Australian Consumer Law, the cappuccino must be safe to drink. Similarly, courts have implied terms (at common law) into contracts for goods that they be fit for their intended purpose.

And the courts will also imply terms by reference to prior dealing between the parties. For example, every day you order a cappuccino, ¼ shot, caramel topping, skim milk, served cold (if that is your preference). There is no need to repeat all those terms as the staff know you. You simply order “your coffee” and all these terms are again implied by prior dealing.

Finally, there can be common law terms implied by custom/trade usage. That is where there is a practice which is so well known, that it is implied into the contract.

• Implied terms – the law

Many terms implied by statute cannot be “contracted out of”. That means the statutory term applies to the contract, even if the parties try to expressly exclude the term.

At common law, including terms implied by prior dealing and/or by custom, the parties can ordinarily expressly agree to exclude the term.

The general test for terms implied at common law is as follows:

The term must be:

(1) reasonable and equitable;

(2) necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) so obvious that 'it goes without saying';

(4) capable of clear expression;

(5) not contradict any express term of the contract.'

- See: BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 40 

• New decision by the High Court: Realestate.com.au v Hardingham

This case is somewhat complex, but at its simplest:

Background:-

1. Mr Hardingham is a professional photographer, and sole director of Real Estate Marketing Australia Pty Ltd (REMA).
2. REMA is in the business of supplying real estate agencies with photos taken by, and floor plans made by, Mr Hardingham (the works).
3. The arrangement between REMA and the real estate agencies was purely verbal. There was no express oral term whereby the agencies could grant a licence to the works to realestate.com.au (nor RP Data).
4. Those agencies then provide photos and floor plans to platforms such as realestate.com.au.
5. Realestate.com.au then provides the images to RP Data Pty Limited.
6. The photos would remain on both realestate.com.au and RP Data even after the completion of the sale.

Proceedings:-

7. Mr Hardingham and his company REMA commenced proceedings in the Federal Court for breach of copyright.
8. It was accepted that Mr Hardingham was the copyright author of the photos and floorplans, and that REMA (his company) had the authority to licence and sublicence the photos and floorplans to others.
9. It was also accepted that RP Data would be in breach of Mr Hardingham’s copyright if it did not have a licence to use the photos/floorplans without a licence to do so, given by either Mr Hardingham or REMA.
10. Mr Hardingham and REMA accepted that they knew the agencies would at least post the works on realestate.com.au, and it would be implied at least that the agencies were authorised to allow realestate.com.au to post the works for the purposes of advertising.
11. What Mr Hardingham and REMA were instead arguing was:
    1. the licence granted to the agencies was subject to a limitation; namely that the use of the photos and floorplans was for the purposes of advertising the property for sale or lease, and once sold or leased, the licence came to an end (i.e. the photos and floorplans would have to be taken down from the website); and
    2. the verbal agreement with the real estate agencies did not permit those agencies to agree to the terms of service for realestate.com.au; particularly to the term in the realestate.com.au contract which would grant realestate.com.au an ‘“irrevocable, perpetual, world-wide, royalty free licence" to do many things including to license other persons’. If the agencies did have such an authority from either Mr Hardingham or REMA, then realestate.com.au could in turn allow RP Data to use the works.

Primary Judge

12. The primary judge found that Mr Hardingham and REMA, objectively viewed, did indeed implicitly authorise the agencies to agree to the terms of realestate.com.au. Thus the works could also be used by RP Data, and could remain online even after the property was sold/leased.
13. The primary judge reached the conclusion on the basis that either the authorisation was “inferred from the conduct of the parties” or “implied into the (verbal) agreements” between REMA and the real estate agencies, in order to give those verbal agreements business efficacy.

Appeal to the Full Court of the Federal Court

14.  A majority of the FCFCA (2:1, Greenwood and Rares JJ, Jackson J dissenting) allowed an appeal by Mr Hardingham and REMA.
15. The majority held that the requirement for an implied term would be that it be implied that REMA had actual knowledge of the (extreme) scope of the terms with realestate.com.au.
16. RP Data was then ordered by the Full Court to refrain from infringing the copyright.

Appeal to the High Court

17. The High Court reversed the decision of the FCFCA.
18. Kiefel CJ and Gageler J reconfirmed the test for determining the terms (noting that the verbal agreement between the parties was not fully articulated) is two stage:
    1. The first step is “one of inference of the actual intention of the parties [looking from the perspective of a reasonable bystander], taking account of the circumstances disclosed by the evidence”. [inferred terms step]
    2. Only after this first step is complete can the court look to imply any term(s). [implied terms step]
19. Keifel CJ and Gageler J analysed the numerous dealings between all the parties, and the history of them. According to their Honours, it would have been “apparent” to Mr Hardingham and REMA that the realestate.com.au uploaded photos/floorplans and allowed them to remain after the sale/lease (this had occurred since 2003), and also that the same would occur with RP Data “within a few days” of realestate.com.au uploading the works. The fact that Mr Hardingham and REMA had ‘apparently’ known of this practice, and said nothing over the course of numerous dealings, meant Mr Hardingham and REMA could hardly now argue the licence was only for a limited timeframe.
20. Gordon J delivered a separate and compelling judgment, clarifying how the FCFCA approached the case with the wrong legal framework. Gordon J held that the first step is to look at what a reasonable observer would make of what passed between the parties to determine the inferred terms. This is not by reference to the ‘actual intention’ of the parties.
21. Gordon J further criticised the FCFCA for conflating ‘inferred terms’ and ‘implied terms’. Where the contract is an ‘informal’ contract such as this, the terms are first inferred from the evidence and then the court will imply additional terms only as necessary.
22. Edelman and Steward JJ, in a separate joint judgment, adopted a similar approach to the other judgments, although preferred to phrase the two step test as: 1) determining the “express terms”, then 2) determining the “implied terms”. Their Honours here use the word ‘infer’ in both steps one and two. That is, you may need to infer the express terms. Then it is essential to use inference to determine the implied terms. But again their Honours confirm the test is a two-step test.

With many contracts requiring terms be implied, this case provides useful clarity on how the courts will approach such matters.

For advice on contract law, including any dispute arising from a contract, contact Maclarens Lawyers on 96823777.