This article is written by Vedika Goel of OP Jindal Global University, Haryana. This article talks about the types, approaches to tacit contracts, and the difference between tacit and imputed tacit terms. The article also gives a small brief on the various factors one must consider while drafting these contracts.

It has bee published by Rachit Garg.

Introduction 

Tacit, as per the dictionary language, means something that is not expressly stated but is rather implied. For instance, if one goes to a shop and presents money to buy a particular product, the act of presenting money is a tacit term. This is because the conduct of the person clearly shows that the intention was to enter into a contract of sale. Therefore, tacit terms in a contract are those terms that are not expressly given in the agreement but are derived from the common intention of the parties, which in turn is derived from the express provisions of the agreement as well as its surrounding circumstances. Contrary to verbal and written contracts, tacit contracts are contracts that draw inference from the conduct of the parties to an agreement. Even though tacit contracts are not defined under the Indian Contract Act, 1872, it is important to remember that tacit contracts can have the same effect as that of express provisions in a contract or agreement.

This article discusses the various types of tacit terms, various approaches to such agreements, along with some crucial factors that must be taken into consideration while drafting such contracts.

Types of tacit / implied terms 

Tacit terms or implied terms in a contract can be of various types. The three most common types of tacit terms are terms implied by the intention of parties, terms implied by law, and terms implied by trade or industry. These are discussed below in this section.

Terms implied by the intention of the parties

Such terms are not expressly provided anywhere in the contract. Therefore, in simple words, these terms are not agreed upon by the parties but still form an essential part of the contract simply due to the intention of the parties to a contract.

Terms implied by law

As the name suggests, these types of terms will automatically come into operation by law. Therefore, unless they are expressly excluded from the contract, such terms automatically come into effect. The case of Starways Trading v. Pearl Island Trading (2018) is the most famous case to illustrate how terms implied by law function. The main cause of dispute between the parties was regarding the purchase of sugar that was distributed to third parties. The supplier of sugar was allowed certain discounts on the duty of the sugar. Section 59 of the South African Competition Act,1988 clearly states that whenever duty is withdrawn or decreased on any goods and such goods are delivered to the purchaser before such withdrawal or reduction, the seller of such goods in the absence of any agreement to the contrary, will be entitled to deduct any benefit it may have received at the contract price due to the said withdrawal or reduction of the duty price. As per this provision, the seller was entitled to reduce the price of the sugar with that of the reduction it received. This was however contended by the seller in the court. The Court ruled that Section 59, being an application of the law, would apply. The Court opined that terms that are implied by law do not have to automatically apply to the contract since such terms can be specifically excluded to cut off the applicability of the contract. However, the exclusion of such terms also cannot render the contract inconsistent with the applicable laws and contractual principles.

Terms implied by trade or industry

There can be certain terms in a contract that automatically apply to contractual relationships. These terms apply simply because they are an established trade or industry practice. Therefore, by assumption, these terms form a part of the contact in that particular trade or industry.

Tacit Contracts and Implied Contracts

While implied contracts are expressly defined under Section 9 of the Indian Contract Act, 1872, tacit contracts on the contrary are nowhere defined in the Act. According to Section 9 of the Indian Contract Act, 1872, an implied contract is made according to the intention, conduct or actions of the parties to a contract. Implied contracts create a legally binding relationship between the contracting parties. Such contacts exist without there being any written or oral agreement between the parties. For instance, if a customer enters a restaurant, the owner of the restaurant is obliged to serve the food to the customers. In return, the customer is required to pay for the ordered food. Therefore, this creates an implied contract between the customer and the restaurant owner. Clearly, even in this case, there was no contract created orally or in writing. The contract was created merely on the basis of the conduct and actions of the parties.

Tacit contracts, on the other hand, are not explicitly agreed upon by the parties but still form a part of the contract based on the express provisions and the surrounding circumstances of the contract. Tacit contracts are contracts that draw inference from the conduct of the parties to an agreement. One can say that tacit contracts are similar to implied contracts. It is also possible to say that tacit contracts are a subset of implied contracts, and therefore both the contracts go hand in hand.

Existing approaches to tacit contracts

Traditional approach 

It is commonly believed that tacit agreements are a direct product of contractual agreements. This understanding and belief largely arise out of the traditional approach. The traditional approach test was based on three important criterias:

  • Firstly, the tacit contract must only extend to the contemplated parties.
  • The act between the parties must be unequivocal.
  • The person on whom the tacit contract is fixed should have complete knowledge of the circumstances connected to the transaction.

This strict criteria was, however, contested as imposing a higher standard of proof on the parties in such contracts. However, this also means that tacit contracts should not be taken lightly by the contracting parties.

Objective approach / Modified declaration theory

The objective approach theory, also known as the modified declaration theory, is based on the premise of a declaration of intentions between the parties. However, in tacit contracts, the theory proposes taking an objective approach. The theory says that in the absence of a declaration of such an intention in tacit contracts, this intention is inferred from the facts of the case. Since discerning objective concurrence of intention is not a plausible approach, the courts will be automatically inclined to look into the facts of the case to determine whether the party who is denying the enforceability of the contract manifested any sort of conduct that could easily infer an ‘objective assent’ to the terms in question despite there being an absence of explicit or apparent consent.

Reliance Theory

This theory, also known as the ‘doctrine of quasi-mutual assent’. As per this doctrine, there is no true consensus between the parties, i.e., no consensus ad idem. So, for instance, if the defaulting party says that no consent with respect to certain terms was given, the court can say that even if no explicit consent was given, the conduct of the defaulting  party led the other party to believe that such terms were agreed upon. Therefore, this conduct will be treated as if the terms were agreed upon by the defaulting party. 

This doctrine was formulated in the English case of Freeman v. Cooke(1848) wherein, the court clarified that, if one keeps aside the intention of the party and if the conduct of the party clearly implies agreement to certain terms in the eyes of a reasonable man, then in consequence, if the other party, based upon this conduct, enters into an agreement, the party whose conduct is in question will be equally bound by the contract as if he had explicitly intended to agreed upon such terms of the party to a contract.

Rule of Estoppel

The reliance theory and estoppel go hand in hand. This essentially means that the former is derived from the latter. While this theory is also applied under similar circumstances as the reliance theory. As per this theory, if the rules of estoppel are fulfilled, the person who breaches or denies the enforceability of the contract can be estopped from denying consent to an apparent or obvious contract. In situations where the reliance theory cannot be applied,  the rules of estoppel can be. The main difference between the reliance theory and the rule of estoppel is that the former deals with representations that are ‘factual’ in nature, while the latter deals with representations that are based purely on ‘intention’.

Difference between tacit and imputed tacit terms 

There are two types of tacit terms. These can be classified into-

Consensual tacit terms

Consensual tacit terms are those terms upon which an agreement has been reached by the parties.

Imputed tacit terms  

Imputed tacit terms are those terms on which an agreement would have been reached by the parties provided their attention was called to such terms before the agreement was concluded.

Factors to be considered while drafting a tacit contract

It is important to note that tacit contracts must be carefully drafted, keeping in mind that the legal enforceability is the same when it comes to express or implied contracts. In order to prove the existence of tacit terms in a contract, the onus of proving the same lies on the party who alleges the existence of such terms. There are certain tests that can be applied when one is drafting such contracts. 

Official bystander test

This test was given recognition in the case of Alfred McAlpine and Son (Pty) Ltd v. Transvaal Provincial Administration(1974) wherein the Court held that a tacit term can be equated to an unexpressed provision in a contract that is inferred by the court from the express provisions and the surrounding circumstances of the contract. The Court referred to the common law test to check whether a tacit term exists in a contract or not. The Court also referred to it as the official bystander test. Accordingly, the test is to see whether a tacit term would apply to a contract, according to an ‘official bystander’. The bystander is required to ask the parties whether a particular term should be added to the contract. 

Business efficacy test

Another test to determine whether there exists a tacit term in a contract or not is the business efficacy test. The main consideration in this test is to see whether the tacit term is required in a contract to make it commercially viable. If the answer is yes, the tacit term would be applicable in the contract.

Reasonable person test

This test takes into consideration the intelligence of a reasonable man. This means what would a reasonable man of average skill, judgement and intelligence believe about the existence of a particular tacit term in a contract. The reasonable man test applies an objective standard of comparison.

Conclusion 

It is extremely important for the parties to a contract to be aware of the various tacit terms that could be applied to the contract before it is made legally enforceable. This will prevent the possibility of breaches as well as lengthy and costly legal disputes. It can also compel the party to perform certain terms of an agreement to which it may not have consented. Therefore, it is extremely crucial that both parties have knowledge and awareness of such terms and the legal consequences they may create. Tacit contacts are a reality and it is time that the consequences, as well as the scope of such terms in a contract, are given statutory backing and legal recognition.

Frequently Asked Questions (FAQs)

  1. Are tacit contracts legally enforceable?

Even though such contracts are not explicitly defined anywhere in the Indian Contract Act, 1872, it still has the same effect as that of express provisions in a contract.

  1. What is the main difference between tacit contracts and implied contracts?

Tacit contracts and implied contracts go hand in hand. Tacit contracts are a subset of implied contracts. Therefore, all tacit contracts are implied contracts.

  1. How can one determine whether a contract contains tacit terms?

In order to know whether a contract contains tacit terms or not, one can apply the bystander test, the reasonable man test or the business efficacy test. 

References 


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