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Implied Contract

A non-verbal and unwritten – yet still legally binding – contract that exists based on the behavior of the parties involved or on a set of circumstances

What is an Implied Contract?

An implied contract is a non-verbal and unwritten – yet still legally binding – contract that exists based on the behavior of the parties involved or on a set of circumstances. Implied contracts are relatively rare compared to the more commonplace express contract, which is usually a formal, written agreement but may also be in the form of an oral agreement.

 

Implied Contract

 

An express contract is a legally binding agreement – oral or written – between two parties, intentionally entered into and understood by both parties as an agreement to perform certain obligations. Most contracts are for some exchange of benefits, with one party receiving goods or services and the other party receiving payment for the goods or services provided.

 

Summary

  • An implied contract is a non-verbal and unwritten – yet still legally binding – contract that exists based on the behavior of the parties involved or on a set of circumstances.
  • Implied contracts may be implied-in-law or implied-in-fact.
  • An implied contract is often based on prior express contracts between the parties involved.

 

Characteristics of Implied Contracts

The distinguishing feature of an implied contract is that while there is no exchange of words – either orally or in writing – that specifies the agreement, it can be reasonably inferred from the parties’ behavior or surrounding circumstances that the parties have a tacit understanding of having formed an agreement.

A general example is when one party accepts some benefit from another party, knowing that the providing party expects to be paid for the provided benefit.

Implied contracts are just as legally binding and enforceable as express contracts. However, enforcement of implied contracts is sometimes difficult since the contract’s specific terms have not been expressed.

In addition, the law in many jurisdictions requires a written contract for some agreements, such as land sales or contracts with an extremely high monetary value, to be enforceable.

 

Example of an Implied Contract – Implied-in-Law

The basic reasoning that supports the legal enforcement of implied contracts stems from the fundamental principle of fairness – the belief that no party should receive benefits from another party without the providing party being justly compensated.

There are two specific types of implied contracts. The first is termed a contract implied-in-law. Such contracts are usually based primarily on a set of circumstances rather than on the behavior of the involved parties.

Courts recognize an implied-in-law contract in situations where one party might otherwise be unjustly enriched at the expense of another party. A key characteristic of such contracts is that a contract may be recognized to exist even though neither party had the intention to enter into an agreement.

The following scenario is an example of an implied-in-law contract. Bob, who is a doctor, happens to be walking by a neighbor’s house and sees the neighbor suddenly collapse on his front porch. Bob rushes to his neighbor’s aid, determines that he has suffered a stroke, and provides medical treatment to the neighbor until emergency services personnel arrive.

Later on, Bob submits a bill for his medical services to the neighbor. A court will typically recognize an implied-in-law contract to exist between Bob and his neighbor simply because the basic principle of fairness decrees that Bob should receive just compensation for the professional services he provided, even though the neighbor did not request the services nor, at the time, possess any intention of paying Bob.

 

Example of an Implied Contract – Implied-in-Fact

The other type of implied contract is a contract implied-in-fact. This type of implied contract is usually inferred from the respective parties’ behavior that suggests that they each have a tacit understanding of having made an agreement that involves obligations on both sides.

Implied-in-fact contracts have the same characteristics as express contracts. There is an offer by one party and acceptance by the other party, some form of consideration exists, and both parties intend to enter into an agreement. The difference is that the terms of an implied-in-fact contract are inferred from the parties’ actions rather than being spelled out orally or in writing.

Implied-in-fact contracts are often based on previous agreements. For example, Company A has, several times in the past, ordered supplies from Company B, expressly agreeing to pay the current market price for the supplies. Then, one day, Company A’s owner orders the same supplies, but there is no specific inquiry about or discussion of price. An implied-in-fact contract to pay the current market price in return for the supplies will be recognized to exist based on the prior agreements between the two parties.

An implied-in-fact contract exists based on the behavior of the respective parties when, for example, one party enters a hair salon, sits down in a chair, and asks for a haircut, which the other party then provides. By asking for the haircut, the first party has implicitly agreed to pay for the haircut. By beginning to cut the hair, the second party has implicitly agreed to provide that service in exchange for monetary compensation.

 

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ program, designed to teach you all the knowledge and skills required to become a skilled credit analyst – including accounting, financial analysis, loan security, and credit evaluation and review procedures.

The following CFI resources will be helpful in furthering your financial education and advancing your career:

  • Arm’s Length Transaction
  • Business Deal
  • Express Warranty
  • Transaction Risk

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