Implied Terms of a Contract and Their Role in Risk Management

Most businesses think their contracts are well-organized, signed, and under complete control. However, some of the duties that your business strictly adheres to may have never been explicitly negotiated and written down in black and white.

This is when implied terms of a contract come into play.

How Do Implied Terms Quietly Shape Your Contracts

Think of a vendor who habitually makes late payments. The payment period in your contract is 30 days, yet your employees accept payments made in 60 days for as long as you can remember. After a while, such a pattern may start to appear as something natural and acceptable.

Legally speaking, it is not only a matter of inadequate control over contract execution. It is a question of intention.

Judges in various jurisdictions tend to consider "course of dealing" when interpreting contracts.

The danger is silent but very serious. While you may have successfully protected your interests at the contract negotiation stage, you will find yourself powerless when it comes to contract implementation.

This is not a drafting problem. This is an execution issue.

The purpose of this blog is to provide a useful toolset for identifying and handling these hidden risks. Rather than reacting to legal disputes, legal departments can proactively conduct audits to examine how contracts operate in practice.

Key Takeaways

• Implied terms in a contract are more likely to stem from consistent conduct rather than provisions.
• Courts use patterns of conduct to determine the intention between contracting parties.
• The most risky vendor relationship type is the long-term one.
• Patterns of acceptance of breaches will permanently change enforceable terms.
• Failure to enforce breach of contract could limit your ability to exercise your rights.
• Audits will enable your business to get its processes in line with the written contracts.
• Technology can analyze hidden patterns in emails, approvals, and workflow.

Is Your Business Routine Creating Unintended Legal Exposure?

Every business creates its own processes to facilitate efficiency. Consistency becomes the standard mode of operation.

But from a legal perspective, consistency is not neutral. Instead, it demonstrates intentionality. If you create a pattern that is obvious, repetitive, and mutually accepted, courts may consider it a part of your contract.

This results in a very subtle, yet significant, change in mindset.

An isolated deviation could be easily overlooked; however, repeated deviations take on a whole new meaning. When both parties continue to behave in the same manner without objection, the law might consider that this behavior accurately depicts the actual agreement between them.

This principle forms the basis of implied terms in a contract.

In fact, the biggest threat to your contract is what I call a silent override. Your written contract states one thing, but your operational behavior suggests another. Over time, the behavioral aspect may erode or modify the legal enforceability of your written terms.

For instance, if you routinely accept late deliveries without penalties, it would become harder to impose strict deadlines later on. The pattern of acceptance undermines your position.

Companies seldom recognize this paradigm shift due to its gradual nature. Instead, teams concentrate on preserving relationships or keeping the business process running smoothly, oblivious to the legal implications of their decisions.

Thus, auditing behavioral aspects is just as important as auditing written agreements.

The Three-Step Audit Process for Contractual Behavior

Identify Legacy Relationships

Begin your audit process by concentrating on legacy relationships.

It would mostly involve vendors or suppliers who have been dealing with the organization for several years. This is due to the possibility that after several years of dealings, the original contract might no longer reflect what really transpired within the business deal.

Look for expired contracts where the parties continued their transaction even without the existence of a new contract. Such situations represent implied-in-fact agreements since behaviors replace contracts.

While legacy deals seem more stable, they actually have potential dangers because the informal practices built up over the years might create problems.

Detecting the "Conduct Deviations"

The next step involves comparing the contract provisions with behavior.

Specifically, the following elements should be checked:

a. Payment terms and payment deadlines;

b. Delivery schedules; and,

c. Pricing and quality of services.

In these cases, the consistent deviation from the requirements stated in the contract becomes an important factor.

Aside from such deviations, "standard market behavior" might also come into play. Teams tend to use standard behaviors in dealing with other firms regardless of the contract stipulation.

Each one of these behaviors might look like a small deviation at first, but collectively, it creates patterns.

Measuring Business Efficacy

After identifying patterns, assess their importance.

Consider whether the contract would work without the behavior. If eliminating the behavior negatively impacts operations, then it may already be a necessary element of the contract.

Another test to use is the "officious bystander" test. Ask what the neutral third party would think about the behavior. Is it an implicit contract term?

If the answer is yes, then the behavior should qualify as an implied term.

This test allows you to tell whether an implied contract term is just flexibility in negotiations or something deeper.

Risk Evaluation for Implied Contract Terms as Breaches

Not all implied contract terms will cause difficulties. Some make processes run more efficiently and reflect business reality.

But implied contract terms that create new obligations or impair your contractual rights may pose risks.

Unjust enrichment is one possibility. If you have been regularly enriched by the other party's actions, the court can force payment despite the lack of a contractual obligation.

A second risk to consider is the erosion of your enforcement options.

If you ignore breaches by the other party, such as missed deadlines or poor-quality products, you may forfeit your right to act on them in the future.

There are also issues around conflicting obligations.

Though terms that are agreed upon via written language usually carry more weight, there are some statutory protections that cannot be overridden by any previous behavior on either party’s part. Safety, quality, and compliance requirements must be followed despite any previous agreements.

This is an interesting combination of written terms, conduct, and statutory obligation.

This interplay needs to be well understood. Failure to comprehend how these three things work together will result in an organization exposing itself to risk and potentially high costs.

Centralizing Contract Audits with Microsoft 365

All companies have the information required to find these implicit risks, but not all companies know how to utilize their information.

Microsoft 365 provides companies with a great start in this process.

Microsoft Purview and eDiscovery help you search your communication records through both Teams and Outlook. This information contains implicit evidence of informal agreements and/or divergences from what is stated within a contract.

“Let us do this for now” and “let us go forward without formalizing this” might represent just such a divergence.

SharePoint can be used as a place to document those divergences.

It can be used to log all instances in which conduct deviates from written terms.

Recurring reviews can also be carried out using Microsoft Lists or Planner. Companies may have periodic auditing for their major vendors so that there is conformity between what is written in the contract and what the company does in reality.

Contract management is made more active through such an approach since companies will be able to detect any problems early on and take corrective action.

From Audit Findings to Actions

Sometimes the greatest contractual risks are not well-hidden at all, as they result from behavior after many years rather than poor contract drafting.

Knowing implied terms in a contract enables organizations to overcome the gap between intentions and actions.

It is important not to restrict flexibility but rather to manage it appropriately.

If you find during the audit that certain patterns in behavior do not align with the terms of your contract, then you should act upon it by notifying your partner about strict compliance with the terms.

If your audit results in patterns inconsistent with your terms, then take action. Simply letting your partner know that you expect strict compliance will suffice to re-establish order.

Consistency creates obligations, but consistency can also be used for regaining control.

Today, legal departments have a distinct edge over their counterparts from years past. With built-in capabilities in Microsoft 365, they can now monitor, measure, and manage the behavior under the terms of their agreements much better than ever before.

Dock 365 takes this one step further by transforming contracts into actionable, measurable contracts. Rather than dealing with any inconsistencies that might arise, companies will get to see how the contract is working out from beginning to end.

Book a demo with Dock 365 today and learn more about managing contracts with consistency and ease.

Like our content? Subscribe to our newsletter on LinkedIn for more insights and updates.