How informal agreements become legal problems

Many Victorian businesses operate on trust. A supplier and a retailer might have traded together for a decade on arrangements that were never formally documented; pricing confirmed by email, delivery terms agreed verbally over the phone, and payment terms inferred from years of expertise. This is the reality of commercial relationships, and the law recognises it.

The problem arises when those relationships deteriorate. When trust breaks down and parties look to their legal rights, they often find that the written agreement (if one exists at all) does not capture the full picture of what was understood between them. This is where implied terms become critical.

What are implied terms?

An implied term is a contractual obligation that was not expressly written into the agreement but is nonetheless treated as part of it by operation of law or by inference from the circumstances. Victorian courts recognise several bases on which terms may be implied:

  • Terms implied by law: certain obligations are automatically read into contracts of particular types under statute or common law. The Australian Consumer Law implies guarantees into contracts for the supply of goods and services, for example.
  • Terms implied in fact: a court may imply a term that both parties would obviously have agreed to if asked at the time of contracting. The classic test asks whether the term is "so obvious that it goes without saying."
  • Terms implied by custom or trade usage: in particular industries, terms may be implied because they reflect universal or near-universal practice in that trade.

"The written agreement is the starting point, not the whole story. What the parties actually did, and what any reasonable person in their position would have understood, is equally relevant to a Victorian court."

Conduct of the parties

In practice, courts look carefully at how the parties actually performed the agreement. A consistent course of dealing, even one that departs from the written terms, can establish what the real terms of the agreement were. If a party has accepted late payment for 18 months without complaint, it may be difficult to later insist that late payment is a repudiatory breach.

This cuts both ways. A supplier who has always provided 30-day credit terms in practice, despite a 14-day written term, may find themselves unable to enforce the stricter contractual provision. The conduct of the parties fills gaps and, in some circumstances, can override the written text entirely.

What this means in practice

If you are entering a significant commercial arrangement, or if an existing relationship is showing signs of stress, the following steps are worth taking immediately:

  • Review your written agreement (if you have one) against how the relationship has actually operated. Where there are gaps or departures from the written terms, document them.
  • Identify any terms that you have treated as standard in your industry. If you are relying on a trade custom or usage, obtain evidence of that expertise from industry sources or expert witnesses.
  • Preserve communications. Emails, text messages, and letters that evidence the agreed terms or the course of dealing are critical in any dispute.
  • Take legal advice before making any demand or formal complaint. How you frame your initial position can affect your legal rights and your prospects of recovering costs.

The Victorian Supreme Court approach

Victorian courts have applied the implied term doctrine carefully and with restraint. They will not imply a term simply because it would be reasonable or sensible to do so. The test remains a demanding one: the term must be necessary for the contract to make business sense, or must be so obvious that both parties would have agreed to it instantly if asked.

What this means for businesses is that a commercially important term that was assumed but never discussed is at real risk of not being implied. If your business depends on a particular understanding: exclusivity, minimum purchase volumes, notice periods. Put it in writing. The cost of a well-drafted contract is always less than the cost of litigating a dispute that could have been avoided.

This article is general information only and does not constitute legal advice. Cohen Lawyers recommends that you obtain specific legal advice in relation to your circumstances before taking any action. If you have a commercial contract dispute or require assistance with a commercial agreement, contact our office on 1300 610 669.