Implied Contract: Understanding Formation & Legal Implications

Did you know that not all agreements involve a handshake or a signature. Sometimes, you enforce legally binding contracts without any paperwork — known as implied contracts.

Implied contracts appear in many aspects of our lives, from everyday services to long-term professional relationships. Understanding these unspoken agreements is crucial for anyone navigating the business landscape.

In this blog, we'll look at the types of implied contracts, how they're formed and enforced, and how they differ from express contracts. We'll also examine real-world examples and discuss how emerging technologies change how we manage these implicit agreements. 

What is an Implied Contract?

An implied contract is a legally binding agreement between two parties without formal written terms or explicit verbal agreements. Instead, it's created through the parties' actions, conduct, and circumstances. These contracts are just as enforceable as any other contract, but they rely on the behavior and implied intentions of the parties involved.

Implied contracts typically arise when:

• One party's actions suggest an intent to agree, and
• The other party reasonably believes an agreement exists and acts accordingly, and
• There's an exchange of value or consideration between the parties

Types of Implied Contracts

Implied contracts usually fall into two categories, let’s look at the difference between the two. Understanding these types helps in recognizing when implied contracts may exist and how they differ in formation and enforcement.

1. Implied-in-fact contracts

Implied-in-fact contracts are created based on the parties' conduct and the circumstances of their interaction. An implied-in-fact contract usually is created by the past conduct of the people involved.

For example, consider a real estate investor whose close friend is a real estate agent and often suggests good properties for investment. Over time, they develop a routine where the friend sends the investor listings that match certain criteria, and the investor pays the friend a commission for successful purchases. Even without a formal written agreement, their consistent pattern of behavior implies a contractual relationship. Both parties understand that when the investor expresses interest in a property, the agent will facilitate the purchase process, and the investor will pay the standard commission upon closing.

2. Implied-in-law Contracts (Quasi-Contracts)

Implied-in-law contracts, also known as quasi-contracts, are imposed by law to prevent unjust enrichment of one party at the expense of another. These are not true contracts, as they lack mutual agreement. An implied-in-law contract is established when one party receives a benefit from another, and it would be unfair for the recipient to retain this benefit without compensating the provider, even though no formal agreement existed between them. The law creates these obligations to ensure fairness in situations where one party might otherwise be unfairly advantaged at the expense of another.

For instance, consider a situation where a burst pipe is causing significant water damage at a commercial building. The regular management company is unreachable and another property management company responds to this urgent maintenance issue as they are located nearby. The property management company takes immediate action to mitigate the damage, hiring a plumber and water damage restoration team. Even though there was no prior agreement with the building owner, the law may imply a contract to ensure the property management company is compensated for its services and the costs incurred.

How Are Implied Contracts Formed?

We know now that implied contracts are formed through actions, conduct, and circumstances rather than explicit agreements. They are often formed when parties interact in a way that suggests a mutual agreement, even without explicit words. This occurs when one party offers or accepts services through their actions, and the other party responds in a manner that indicates agreement.

Let’s look at different ways in which implied contracts are formed.

1. By past dealings: You establish implied contracts by expressing the same behavior patterns with another party. Consider a freelance writer submitting articles to a magazine for a set fee each month. If they continue to submit articles and the magazine keeps publishing them, an implied contract based on past dealings exists. So here the freelancers continue to operate in a certain way based on their past collaboration.

2. Through industry customs: In certain fields, widely accepted practices can form the basis of implied contracts. For instance, in the construction industry, it's customary for contractors to warranty their work for a certain period. This warranty may be implied even if not explicitly stated in a contract. Here, as everyone is familiar with how the industry works, they have a clear understanding of what to expect.

3. By legal necessity: Sometimes, the law imposes contractual obligations to prevent unfair situations. For example, consider a commercial landlord who fails to maintain essential services in a rented property, such as heating or water supply.  If a tenant must pay out-of-pocket for urgent repairs to keep the property habitable, the law may create an implied contract. This implied contract would require the landlord to reimburse the tenant for these costs, even if the lease doesn't explicitly mention such situations. 

4. Through silence or inaction: In specific contexts, failing to object or take action can be interpreted as agreement. For instance, if a tenant continues to occupy a rental property even after the lease expires without discussing renewal, and the landlord continues to accept rent, this implies a month-to-month tenancy. Here, as both the parties didn’t have any objections, automatically an implied agreement to continue the arrangement.

5. By partial performance: When one party begins to fulfill what would be their contractual obligations, an implied contract can form. For example, a commercial property owner verbally agrees to hire a landscaping company. The company begins regular maintenance work on the property. The owner sees the work being done and doesn't object. Even without a signed contract, the landscaping company's actions and the owner's silent acceptance imply that a contract exists between them. In this scenario, the actions of both parties suggest they acknowledge the existence of an agreement.

How are Implied Contracts enforced?

Implied contracts, despite lacking formal documentation, are legally binding and can be enforced similarly to express contracts. It might be a little challenging as there’s no written agreement, but it's not possible. The only thing to keep in mind here, not all implied contracts are straightforward and it might be hard to interpret them. And, that’s why people involved in them end up going to court.

To enforce an implied contract, here are a few steps to follow:

1. Document the agreement: While there's no formal contract, gather any evidence that supports the existence of an agreement. This could include emails, text messages, or records of actions taken by both parties. For example, if you've been mowing your neighbor's lawn for a fee, keep records of the dates and payments received.

2. Prove mutual understanding: Show that both parties were aware of and agreed to the terms of the arrangement. That is, demonstrate a pattern of behavior or communication that indicates agreement. In our lawn-mowing example, you might show that your neighbor regularly leaves payment after each mowing session.

3. Attempt informal resolution: Before taking legal action, try to resolve the issue directly with the other party. Many disputes can be settled through open communication or negotiation.

4. Seek legal counsel: If informal resolution fails, consult with a lawyer who specializes in contract law. They can advise you on the strength of your case and the best course of action.

5. Consider alternative dispute resolution: Mediation or arbitration can be less expensive and time-consuming than going to court. These methods can help resolve disputes while maintaining relationships.

6. File a lawsuit: If all else fails, you may need to file a lawsuit to enforce the implied contract. And, then await the court's decision on the validity of the implied contract and any potential remedies. Be prepared for a potentially lengthy and costly process.

Express contract vs Implied contract

An express contract refers to an agreement made in writing or through a verbal agreement between two parties. Whereas implied contract is the opposite of it where there’s no kind of agreement verbal or written. But both are legally binding. 

However, there are differences between both.

While both express and implied contracts are legally binding, they each have their advantages and potential challenges. Express contracts are generally preferred for their clarity and ease of enforcement, implied contracts are equally valid in the eyes of the law. However, due to their nature, implied contracts may require more effort to prove and enforce if disputes arise.

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Creating and managing contracts is a complex and daunting process. It requires meticulous attention to detail before sending them for approval. Errors or inconsistencies can lead to significant costs. Moreover, relying on manual contract storage methods makes it challenging to maintain version control, enforce security preferences, track critical dates and milestones, and adhere to archiving rules.

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Suggested read:

Essential Elements of Valid Contracts

Uncover the key components that make a contract legally binding, ensuring your agreements are enforceable and protect your interest

Frequently Asked Questions(FAQs):

1. Are implied contracts legally binding?

Yes, implied contracts are legally binding. They hold the same legal weight as express contracts (written or verbal agreements). The key difference is that implied contracts arise from the actions and conduct of the parties, not necessarily from spoken or written words.

2. How can I protect my business from unintended implied contracts?

Here are some ways to protect your business:

• Clear communication: Be upfront about your expectations and terms of service. Use written contracts whenever possible, even for small transactions.
• Established policies: Develop clear policies for common situations, like returns, refunds, and service limitations.
• Posted signage: Use signage to communicate policies for entering your premises or using your services.
• Track time and materials: If you do work without a formal contract, keep detailed records of time spent and materials used.

3. Can an implied contract override a written contract?

Generally, no. A well-written contract outlines the terms of the agreement and supersedes any implied terms. However, there are some exceptions:

• Unconscionable terms: If a written contract contains unfair or one-sided terms, a court may enforce implied terms to prevent injustice.
• Gaps in the written contract: If the written contract is silent on a specific issue, an implied term may fill the gap based on the parties' conduct.