It goes without saying… but is that inference or implication? Ascertaining the terms of informal contracts

Lindsey Cregan, Dilip Ramaswamy and Joe Bissett
21 Dec 2022 Time to read: 4.5 MIN

An informal contract is legally binding, but will inevitably involve ambiguity as to its terms, and hence potential uncertainty in business dealings, which in turn can lead to distracting disputes.

Informal contracts – those where the terms have not been articulated – often exist in day-to-day business relationships. Yet the High Court of Australia’s decision in Realestate.com.au Pty Ltd v Hardingham; RP Data Pty Limited v Hardingham [2022] HCA 39 shows the complexities of ascertaining the terms of an informal contract, including the recognition of implied terms.

So how is that task approached? This article explores that issue, and where future courts might develop the law – and what all of this means for your everyday business arrangements.

A photographer walks into a house for sale

Mr Hardingham and his company Real Estate Marketing Australia Pty Ltd (collectively, REMA) licensed photographs and floor plans of residential properties to real estate agencies for property marketing. The terms of the agreements were not written, nor were there express oral agreements. The contracts were informal.

These informal contracts authorised the agencies to upload the materials to a platform operated by Realestate.com.au (RE). However, by uploading the materials to RE, the agencies were agreeing to RE’s terms and conditions of use, which permitted RE to sub-license the materials however it wished. RE then sub-licensed the materials to RP Data Limited (RP Data), which uploaded the materials to its own website. The material remained on RP Data’s website post-completion of the relevant transaction, as historical information about the property.

REMA brought Federal Court proceedings against RP Data, claiming that RP Data had infringed REMA’s copyright by using its materials on RP Data’s website. The key issue was whether the informal contract between REMA and the agencies limited the agencies’ use of REMA’s materials to marketing the subject property for the current sale or lease.

At first instance, Justice Thawley held that REMA licensed the agencies to sub-license its materials to RE on RE’s usual terms (which would include an unlimited sub-licence to RP Data). REMA either knew or assumed RE made the materials available after completion of a property marketing campaign and transaction. His Honour held the objective circumstances were such that the sub-licensing arrangement could either be:

  • "inferred" from REMA’s and the agencies’ conduct (including their course of dealings); or
  • "implied" into the agreements between REMA and the agencies to give them business efficacy.

By majority, the Full Court disagreed, finding that, on the facts available, a term could not be inferred or implied that REMA authorised the agencies to sub-licence REMA’s materials to RE on RE’s usual terms. The High Court then granted RE and RP Data special leave to appeal.

A two-step approach to figuring out the terms of an informal contract

The key issue for the High Court was to identify the terms of the informal contracts between REMA and the agencies. While the Court reiterated that the objective theory of contract is undoubtedly “in command of the field”, and agreed this process involved two steps, there were nevertheless different approaches.

In separate judgments, the majority (Chief Justice Kiefel and Justice Gageler (jointly) and Justice Gordon) agreed that, in effect, the ultimate question is what the parties’ words and conduct, when judged in light of what the parties knew, would have led a reasonable person to conclude were the terms of the contract between them. After determining the terms of the contract, the question was then whether any terms were implied into that contract.

Neither judgment applied this second step in this case because the majority had already found that the scope of the licence given to the agencies could not be limited in the way contended by REMA, although by slightly different routes.

Chief Justice Kiefel and Justice Gageler considered an agreement and its terms could be inferred from the parties’ conduct, including an absence of words (that is, there was a “tacit understanding” as to how RE would use REMA’s materials). Justice Gordon emphasised REMA’s knowledge of RE’s intended use of REMA’s materials, namely that RE and RP Data would use those materials after each property marketing campaign ended.

Both judgments however concluded that, as nothing was said to the contrary, there was a “common” or “mutual” understanding between REMA and the agencies that REMA’s materials could be used as they were: the agreement included a term that the agency had a right to sub-licence use by RP Data of REMA’s materials after the relevant marketing campaign.

A different view… it was implied

In contrast, Justices Edelman and Steward considered there is a “common law of contract, not different common laws for different categories of contract”. It was a “very basic error” to say that informal contracts were governed by different rules – in fact, they considered the terms of an informal contract “might be far more carefully formulated than those of a formal contract”. The “extremely well established” first step was to ascertain the express terms of the contract (which necessarily had to be expressed in words) and the second, to identify any implied terms. Since there were no words expressed by the parties as to the agencies’ licence to use REMA’s materials, there could be no express term. Their focus was therefore on the second step. It seems they would not agree with the sentiment that “the line between an inference and implication will not always be easy to draw” (Breen v Williams (1996) 186 CLR 71).

Justice Gordon’s approach in particular differs markedly from that of Justices Edelman and Steward. Contemplating the approach to informal contracts, Justice Gordon considered it “requires consideration and application of basic contractual principles, not reference to, or application of, a taxonomy of contractual terms as express or implied”. She continued, referring to the objective theory of contract’s ascendancy, that “there is now little, if any, distinction between…the case of an “implied” term by reference to the obvious presumed or imputed intention of the parties, and the identification of the “express” terms of an agreement by reference to the objective intention of the parties”. In her firm view, “implied” terms are not the “whole universe” of unexpressed contractual terms.

Just how strict is the approach to recognising terms implied into informal contracts?

The Court’s views on the application of principles governing the recognition of implied terms also diverge, in particular the “flexibility” with which the five BP Refinery criteria are to be applied.

In Justice Gordon’s view, there could not be “degrees” of necessity when considering the five requirements to imply a term into a contract. In contrast, Justices Edelman and Steward considered the flexibility of the five criteria can be particularly evident with informal contracts. In such cases, the usual focus would be on the first two BP Refinery criteria: reasonableness and equity, and necessary for business efficacy. Their Honours considered the objective circumstances in which the agreements between REMA and the agencies were made, which significantly included that the agencies could not practically contract out of the terms imposed on them by RE. In those informal circumstances, the relevant term as to the agencies’ use of REMA’s materials satisfied all five BP Refinery criteria – including being necessary for business efficacy.

The views of Chief Justice Kiefel and Justice Gageler appear more aligned with those of Justices Edelman and Steward; they noted Justice Deane’s well-known caution against an “over-rigid application” of the BP Refinery criteria, and referred to previous observations that it is unlikely that a non-obvious term would be necessary for a contract’s effective operation. On that basis, the High Court’s prevailing view on identifying implied contractual terms presumably tends to the more flexible end of the spectrum.

Key takeaway

  • All this contractual theory is intellectually very interesting for lawyers, but really just reinforces what commercial parties already know.
  • An informal contract is legally binding, but will inevitably involve ambiguity as to its terms, and hence potential uncertainty in business dealings (even if, like RE, the strength of your position seems obvious), which in turn can lead to distracting disputes.
  • To be more certain a contract does what you want it to do and minimise the scope for your counterparty to act capriciously, there is value in carefully crafting a document clearly setting out the key terms.

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Dilip Ramaswamy

Sydney
Senior Associate
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.