Many people believe that to have a contract, there must be an express written contract signed by both sides. But that is not the law.
Contracts can be formed by words (i.e., an oral contract) and conduct. Contracts formed by conduct are called implied contracts, and they are as binding and enforceable as written contracts. This principle guarantees fairness and ensures that no one benefits unfairly at the expense of another when there is no formal written or verbal contract.
Unlike express contracts, where terms are explicitly stated, implied contracts rely on the reasonable expectations of both parties and how they act. They are prevalent in everyday business interactions. For example, when order a meal at a restaurant and eat it, you have entered an implied contract to pay for that meal, even though you did not sign an agreement with the restaurant to pay for the meal before you ate it.
Legally, courts recognize implied contracts when they determine that the parties have a mutual understanding. This understanding must be reasonable and supported by conduct that indicates an expectation of a contractual relationship. Even though both parties don’t formally agree upon the terms, implied contracts are enforceable when the circumstances show that both parties intended to enter into an agreement.
Understanding the mechanics of implied contracts enables businesses and individuals to prevent disputes and safeguard their legal rights in commercial transactions.
Types of Implied Contracts
Implied contracts generally fall into two categories: implied-in-fact and implied-in-law contracts (quasi-contracts). While both are legally recognized, they differ in how they are formed and enforced.
Implied-In-Fact Contracts
An implied-in-fact contract assumes that both parties have clear obligations to the other, even if they never explicitly stated it in writing or speech.
California law defines an implied contract as one, the existence and terms of which are manifested by conduct.
For an implied-in-fact contract to exist, the following elements must be present:
- Mutual agreement: The actions of both parties indicate that they have a shared understanding.
- Consideration: There is an exchange of value, such as goods, services, or payment.
- Conduct reflecting an agreement: One party provides a service or product, and the other party accepts it without objection.
For example, if a client regularly orders services from a freelancer without signing a contract, the freelancer completes the work expecting payment. Since both parties have engaged in a pattern of behavior that suggests a business agreement, an implied-in-fact contract exists.
Implied-In-Law or Quasi-Contracts
An implied-in-law contract, or quasi-contract, is not an actual contract. Instead, courts use this term to describe an obligation to pay someone money when you have received a benefit that would be unjust to keep without payment. This obligation arises regardless of the parties’ intentions and is designed to restore justice.
Unlike regular contracts, where both sides agree, quasi-contracts occur when one person gives something to another expecting payment, and it would be unfair for the receiver to keep the item without paying. The law steps in to require the receiving party to compensate the other party, so both sides are treated fairly.
Courts may impose a quasi-contract if:
- One party receives a benefit at the expense of another
- It would be unjust to allow that party to keep the benefit without paying for it
- The receiving party had the opportunity to reject the benefit but did not
Consider this example: A hospital provides emergency medical care to an unconscious patient. Even though the patient never agreed to pay, the court may conclude there was an implied-in-law contract, requiring the patient to cover the reasonable cost of treatment. This prevents the patient from receiving a free service at the hospital’s expense.
How Are Implied Contracts Formed?
Even without a written contract, implied contracts can still be legally binding, if:
- One party provides goods or services with a reasonable expectation of payment or compensation
- The other party knowingly accepts the benefit and does not object
- There is a clear business relationship or precedent for the transaction
One common example of an implied contract is a handshake deal. In such cases, two business partners may split profits from a joint venture without drafting a written agreement. If they consistently divide profits and operate as though a contract exists, their actions may be enough to establish an implied-in-fact contract. Similarly, in customer-service interactions, an auto repair shop may fix a returning customer’s vehicle without discussing a price, knowing that the customer always pays. Because the expectation of payment is based on previous transactions, an implied contract can be formed.
To determine if an implied contract exists, it’s important to examine how the people acted and the overall situation. This includes whether both parties exchanged goods or services, and if either party accepted something of value from the other. If it seems like both parties intended to be bound by an agreement, they might be able to enforce the implied contract just like a formal, written contract.
Are Implied Contracts Legally Enforceable?
Yes, implied contracts are legally enforceable, but only if they meet specific criteria. Courts evaluate these contracts based on the behavior and expectations of the parties involved.
The best way courts do this is by assessing these conditions:
- Mutual intent: The actions of both parties indicate a shared understanding of the agreement.
- Consideration: Both parties must exchange something of value.
- Clarity of terms: While not explicitly written, the expected obligations must be reasonably straightforward.
- Acceptance of benefits: One party must knowingly accept goods or services without objection.
If one party provides a service and the other party knowingly accepts it, the law presumes consideration which reinforces the contract’s validity.
The Implied Covenant of Good Faith and Fair Dealing
The implied covenant of good faith and fair dealing is a legal cornerstone that underpins all contractual relationships. It operates as an invisible hand, guiding parties towards equitable conduct even when the contract does not explicitly state-specific terms. This covenant is recognized by courts as an inherent component of every contract, ensuring that neither party acts in a way that undermines the spirit of the agreement or deprives the other party of the benefits they reasonably expected.
This covenant also extends to performing contractual obligations. It requires parties to carry out their duties with diligence and honesty, refraining from any actions that impede the other party’s ability to benefit from the contract. This includes a duty to disclose material information that could affect the other party’s decision-making, and to refrain from taking advantage of ambiguities in the contract to exploit the other party.
The implied covenant of good faith safeguards against dishonesty and opportunism in contractual relationships. It ensures that parties deal with each other fairly and equitably, upholding the integrity of the contract and promoting a sense of mutual trust and respect. By requiring parties to act in good faith, the covenant helps to prevent disputes and fosters a more harmonious and productive business environment.
Real-World Examples of Implied Contracts
Implied contracts appear in everyday business and employment interactions, often without a second thought. When two parties have a history of working together, an agreement can exist even without anything in writing. Here are some common scenarios where implied contracts are involved.
Employer-Employee Relationships
In employment law, implied contracts often arise from company policies, verbal promises, or long-standing workplace practices. For instance, if an employer consistently states that an employee will not be fired without cause and maintains a progressive discipline policy, an implied contract may protect the employee from sudden termination.
Employers can avoid unintentionally creating implied contracts by clearly stating in employee handbooks and offer letters that employment is at will. This means they can terminate employees at any time without cause. Regularly updating policies and ensuring verbal commitments align with written agreements also help prevent unintended contractual obligations.
Service Payments Without a Written Agreement
One common example of an implied contract is a freelancer completing a project for a client without a written contract. If the client has previously paid for similar work and has approved the project, an implied-in-fact contract may exist, ensuring the freelancer is compensated for their efforts.
Similarly, an architect designs a home without a signed contract, but with the homeowner’s knowledge and consent, may have an implied contract. If the homeowner does not object to the work and benefits from the design, courts may enforce payment based on the reasonable expectation of compensation.
Business Transactions
Businesses frequently engage in transactions where goods or services are provided without explicit contracts. For example, a supplier delivering products to a retailer based on a history of recurring orders may create an implied contract. If the retailer accepts the goods and continues operations as usual, courts may recognize an agreement requiring payment.
How to Prove and Enforce an Implied Contract
To prove and enforce an implied contract, courts generally look for the following key elements:
- Mutual agreement through actions or conduct: Both parties must have acted in a way that suggests they understood and accepted the terms of their working relationship, even without a written agreement.
- Presence of consideration: Each party must have provided something of value, such as services, goods, or payments, demonstrating a mutual exchange.
- Consistency in conduct: The parties must have interacted in a manner that reflects an ongoing understanding of their obligations, such as repeated payments for services rendered or continued business dealings under the same terms.
Courts will often consider past dealings, industry standards, and communications to determine whether an implied contract exists. If both parties have a history of working together under unwritten but understood terms, it strengthens the case for enforcing the contract.
What to Do if a Dispute Arises
Disagreements over implied contracts can be complex since a document usually does not exist to support the existence of the agreement. If a dispute arises, consider the following steps:
- Gather evidence: Collect any materials that demonstrate the existence of an agreement, such as emails, invoices, payment records, text messages, or evidence of past behavior that supports an implied understanding. Witness statements from colleagues or industry professionals can also strengthen your case.
- Consult a business lawyer: An attorney can help you determine whether your evidence is sufficient to prove an implied contract in court and determine a plan for moving forward.
- Explore legal resolution options: Depending on the situation, resolving a dispute may involve mediation (negotiation with a neutral third party), arbitration (a binding decision from a third party), or litigation (filing a lawsuit).
Document agreements whenever possible to minimize the risk of implied contract disputes. An email summary of key terms, a simple agreement in writing, or confirmation of expectations in text messages can provide clarity and prevent misunderstandings.
In business, agreements aren’t always written down — but that doesn’t mean they don’t exist. Implied contracts ensure fairness when parties operate on trust, longstanding business practices, or verbal commitments. However, their unwritten nature makes disputes inevitable, often leading to costly legal battles. Proving an implied contract requires solid evidence and a strategic approach, making legal guidance essential. To safeguard your business, document agreements whenever possible and consult an attorney when uncertainties arise.
FAQs About Implied Contracts
Are Implied Contracts Legally Binding?
Yes, implied contracts can be legally binding as long as they contain essential elements of a contract, such as mutual agreement and consideration. Courts may enforce an implied contract if sufficient evidence indicates that both parties intended to agree with their conduct.
What Is an Example of an Implied Contract in Business?
One example is when an employer implies job security based on company policies or previous practices. Another example is when a customer orders food at a restaurant, creating an implied contract that they will pay for the meal.
How Can You Prove an Implied Contract Exists?
Proving an implied contract requires demonstrating:
- Both parties acted in a way that indicated a mutual agreement.
- One party provided goods or services with the reasonable expectation of compensation.
- The other party accepted those goods or services without objection.
Documentation such as emails, invoices, or industry norms can support the claim.
What Is the Implied Covenant of Good Faith and Fair Dealing?
The implied covenant of good faith and fair dealing is a legal principle that requires parties to act honestly and fairly toward each other, even if it is not explicitly stated in the contract. It ensures that neither party undermines the agreement’s intended benefits.
Can an Implied Contract Be Breached?
Yes, an implied contract can be breached if one party fails to uphold their obligations. For example, an employer terminating an employee despite an implied promise of job security, may constitute a breach. When this happens, the wronged employee can seek compensation for damages.
How Do Courts Determine If an Implied Contract Exists?
Courts consider factors such as the behavior of both parties, industry standards, and any past dealings between them. If enough evidence shows that an agreement existed through actions and conduct, the court may rule in favor of enforcing the implied contract.
Do Implied Contracts Need to Be in Writing?
No, implied contracts do not require a written agreement. They are established through actions, conduct, or circumstances that indicate an agreement exists. However, having written documentation can help prevent disputes and clarify the agreement’s terms.
If you’re facing a contract dispute or need to enforce an implied contract, Klein & Wilson’s award-winning trial lawyers are ready to protect your interests and deliver results. With a proven track record of success in contract law, we provide aggressive, strategic representation to secure the best possible outcome for your case. Contact Klein & Wilson today at 949-239-0907 or schedule a consultation online and put a winning legal team in your corner.