This article has been written by Satendra Pratap Singh pursuing the Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.
Every contract contains rights and duties of both the parties, breach of which may cause legal action against the party at fault. The rights and duties are generally expressly stated in the contract in order to avoid any future disputes arising out of it. However, the existence of some terms in the contract is so obvious that even if they are not expressly stated, they would be held to be implied by the courts of law. This is known as the “Officious Bystander Test”. Under the said test, a term which has to be implied must be so obvious that it goes without saying, so that, if the parties were making their bargain in the presence of an officious bystander, who was to suggest some express provision for it in their agreement, they would actively subdue him with a common ‘Oh, of course!’
The sources of implied terms are varied including inter alia, statutes, common business practice, the intention of the parties, international obligations, and common law precedents established over the passage of time. One such case has to undergo a multi-layered test, in order to imply a term into a contract. The conditions for using implied terms were set out by Lord Simon of Glaisdale, in the case of BP Refinery (Westernport) Pty Ltd vs. The Shire of Hastings, wherein it was held that “for any term to be implied, following conditions must be satisfied:
- It must be reasonable and equitable;
- It must be necessary to give business efficacy to the contract so that no term will be applied if the contract is effective without it;
- It must be so obvious that ‘it goes without saying;
- It must be capable of clear expression;
- It must not contradict any express term of the contract. “
For example, though there is no general duty of good faith provided in the Indian Contract Act, 1872, the Delhi High Court had recently held in Association of Unified Telecom Service Providers v Union of India that “Every contract contains an implied covenant of good faith and fair dealing, obligating the contracting parties to refrain from doing anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”
Implied terms in a construction contract
A construction contract is a type of contract which sets the scope of work along with various rights and duties of the parties involving the employer as well as the contractor. The construction industry in India has not subscribed to any standard form of construction contract. However, there are some common implications established over the period:
- The employer is expected to hand over the possession of the construction site within the stipulated time and without any delay.
- Instructions and any relevant information regarding the project shall be given by the employer within a reasonable time.
- The contractor shall carry out the work with adequate skill and caution (in a workmanlike manner).
- The contractor is expected to provide goods and materials that are good in quality and reasonably fit for purpose.
The implications in a contract are based on the principles of equity and good conscience. The judges read the implied terms not because of any external pressure but because of an intrinsic failure. Relying on implied terms turns beneficial to both the parties as many times the parties face a trade-off between the costs and benefits of writing more complete contracts, also helps them to invest their resources in the completion of other areas of the contract.
How implied terms arise in a contract?
An implied term is a legally binding obligation that derives from the conduct, actions, circumstances, or intention of the parties. It is never in written form and due to lack of documentation, parties may find it hard to enforce it in a court of law. There should not be any unjust benefit to a party at the expense of the other party. E.g., If a consumer purchases a product from a shopkeeper, it is implied that the product should be free from any defects and damages. There are two forms of implied contract:
Implied-in-fact vs. Implied-in-law
- Implied-in-Fact: These types of contracts depend on the behavior and actions of the parties. E.g. If there is an agreement between the two parties wherein B has to look after A’s house when A is out of town and in return A gives B $100. This is an oral agreement, still, A gives B $100 for A’s services twice. The third time, A does not give B the consideration of $100 for looking after his house. Accordingly, A would be the party at fault because it is now implied that whenever B looks after A’s house, A gives B $100.
- Implied-in-law: These agreements or contracts arise due to an obligation of justice and to avoid ‘unjust enrichment. It is a remedy that enables the plaintiff to recover a benefit conferred on the defendant. Since the idea of a claim for redress of unjust enrichment did not go well with either the category of the contract or torts, hence they are tagged as claims in the quasi-contract. E.g., if one of the customers in a hotel gets sick while having dinner and the fellow customer Mr. B, who is a doctor, treats him in his hospital and accordingly sends a bill for his services. If it is established that Mr. A got sick after having the food served by the hotel and asks the hotel to pay his hospital bills, then the hotel cannot refuse to pay for the same.
What are the laws applicable to implied construction contracts?
Generally, there is no specific statute to comply with to carry out a construction contract. The parties are required to comply with the requirements of the Indian Contract Act, 1872 for them to be enforceable. Apart from that, there are various acts that have to be complied with to carry out the construction activity like Industrial Disputes Act, 1947; Workmen Compensation Act, 1923; Minimum Wages Act; etc. Laborers are given the recognition as a workman under Section 2 of Industrial Disputes Act. Which protects their statutory benefits and rights at the hands of the employer or contractor. Further, the contractor is required to get a license under the Contract Labour Act, 1970 if more than 20 workmen are hired for an establishment. Quite often, laborers get injured at the construction sites who are compensated by the contractor under the Workmen Compensation Act, 1923. Legally, laborers are also entitled to timely and minimum payment of wages fixed by the appropriate government under the Minimum Wages Act, 1948 and Payment of Wages Act, 1936. In 2019, the Indian Parliament passed The Code on Wages, 2019 the purpose of which was to amend and consolidate the laws on bonuses and wages.
What happens if there is a delay in the performance of the construction contract?
In India, the delay in performance is governed under Section 54 and Section 55 of the Indian Contract Act, 1872 wherein the innocent party can (a) terminate the contract and put an end to all the primary obligations of both the parties remaining unperformed (b) claim damages for breach of contract from the party at fault. Also, in the case of the State of Kerala vs. M.A. Mathai, the Supreme Court held that even if the contractor has undergone a contract with the employer not to file a claim for delay in performance of the contract occasioned by an act of the employer, still a claim would be entertained in one of the following conditions i.e.,
a) If the contractor repudiates the contract under Section 55 of the Indian Contract Act, 1872.
b) Employer gives an extension of time and agrees to allow the escalation of rates or compensation for delay by entering into a supplemental agreement.
c) If the contractor makes it clear that escalation of rates or compensation for delay shall be borne by the employer and the employer accepts the performance by the contractor despite the delay and such notice by the contractor putting the employer on terms.
The development of law has seen ‘the five-condition test’ or Penta- test for an implied condition to be acknowledged while interpreting a contract and this test has been witnessed in the case of B.P. Refinery (Westernport) Proprietary Limited vs. The President Councillors and Ratepayers of the Shire of Hastings the test states that for the implied term to be acknowledged it must be: – (1) reasonable and equitable; (2) necessary to give business efficacy to the contract; (3), i.e., The Officious Bystander Test; (4) capable of clear expression; and (5) must not contradict any express term of the contract. However, the Supreme Court of India in the case of Nabha Power Ltd. (Npl) vs Punjab State Power Corporation gave a word of caution and held that the commercial courts shall not be proactive to look to implied terms of the contract and a contract should be read as it reads, as per its express terms because in the modern age there is highly technical expertise with legal brains from all sides required for drafting a contract and implied terms should be read-only when the above mentioned Penta Test comes into play and is extremely necessitated. Lord Hoffman also in a lucid judgment held that the courts do not hold any power to improve any document which they are asked to construe, be it a contract, statute, memorandum of association, Articles of Association, etc. They cannot introduce any terms to make the document fairer and more reasonable instead the only concern shall be restricted to discover what the instrument says.
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