What Every C-Suite Should Know About Implied Contract Terms!

Most businessmen can review a contract and identify the express terms it contains. But far fewer are aware, much less can identify,  the various implied terms - not expressly contained within those same contracts. All contracts - whether for “goods” or “services” – may contain implied legal obligations imposed upon the parties. These implied duties are not stated within the contract but are rather imposed as a matter of law. No consent, agreement, or even knowledge is required for these implied terms to apply. Such implied duties are just as binding upon the parties as if recited within the contract, unless expressly disclaimed. Of course such implied duties cannot possibly be disclaimed unless they are known to exist in the first place!.

The Uniform Commercial Code, or UCC imports multiple implied obligations into every contract governing the sale of “goods”. [See “Does the UCC or Common Law Govern Your Contract”, posted 12/13/23]. These implied duties cover a variety of issues and are imposed in UCC contracts unless expressly and properly disclaimed. Every contract governed by the UCC may contains an implied duty of good faith and fair dealing.  [UCC §1-304]. This duty is intended to prevent either party from destroying or injuring the rights of the other party from receiving the benefits of the contract. UCC Contracts may also contain an implied warranty of title, indicating the seller has ownership of the goods, the right to sell them, and there are no liens or patent infringements impacting the sale of the “goods”. [UCC §2-312]. Goods sold by a merchant under a UCC Contract may also contain an implied warranty of merchantability, requiring that the “goods” meet the reasonable expectations of the buyer. [UCC §2-314].  Goods sold by a merchant may also contain an implied warranty of fitness for a particular purpose if the seller has reason to know that the “goods” are required for a particular purpose and the buyer is relying upon the sellers skill or judgment in making the purchase. [UCC §2-315]. In many, but not all States, these implied duties may be expressly disclaimed in conspicuous writing through the use of terms similar to “sold as is,”  “with all faults” or similar type language. Some States also require that the disclaimer expressly name the implied duty sought to be disclaimed. [UCC §2-316].

The common law of contracts, or CLC likewise imports multiple implied obligations into every contract dealing with “services.”  Like the UCC, the CLC in most States imposes an implied duty of good faith and fair dealing prohibiting one party from depriving the other party from receiving the benefits of the contract. Likewise, most States impose an implied obligation for the accuracy and sufficiency of information furnished by one party to the other and material to the performance of the contract. Most States also impose an implied duty not to hinder or delay the performance of one party by the other by active means. Many States also impose an implied duty to disclose superior knowledge of existing facts between parties that would materially impact performance of the contract.  

Unlike, the UCC, there are no uniform requirements as to the disclaimer of implied warranties under the CLC, and it is generally held that the “parol evidence rule” does not prohibit the incorporation of implied duties and obligations into contracts dealing with the provision of services. So when disclaiming implied warranties imposed within service contracts under the CLC, parties should use broad language disclaiming “any and all implied duties and obligations” not expressly identified within the contract documents.