Definition
An implied contract in finance refers to an agreement that is not written or spoken but is assumed to exist due to the behavior of the involved parties. It’s established by the facts and circumstances that surround a situation. This type of contract holds as much legal weight as an express contract, which is explicitly agreed upon verbally or in writing.
Key Takeaways
- Implied contracts refer to agreements where the terms are not explicitly stated but are inferred from the actions, conduct, or circumstances of the parties involved. They are as legally binding as express contracts.
- There are two main types of implied contracts: ‘implied in-fact,’ where the contract is inferred from the actions or circumstances, and ‘implied at law,’ where the law creates a contract to prevent unjust enrichment of a party.
- Although implied contracts are legitimate, they can often lead to disputes as the terms of the contract are not explicitly stated and documented. Therefore, it’s always advisable to have all important agreements formalized in written form to avoid any potential legal ambiguities.
Importance
An Implied Contract is a crucial concept in finance because it establishes obligations and agreements not explicitly stated but inferred by the actions, behavior, or circumstances of the parties involved.
These contracts hold significant relevance because they create an element of trust and understanding in professional relationships, fill in gaps that may have been missed in explicit agreements, and ensure fair dealings.
Although they may not exist in documented form, implied contracts are legally binding.
When disputes arise, courts evaluate the actions and circumstances related to relevant transactions to determine the existence of an implied contract.
Therefore, understanding implied contracts is essential for safeguarding financial and business relationships and avoiding potential legal issues.
Explanation
An implied contract is often used in many kinds of business dealings and investments to establish a fair and just exchange of value, when a written or verbal agreement might not exist. In finance, for example, when you deposit money in a bank, there is an implied contract that the bank will protect your money and make it accessible to you when needed.
This understanding is not often set in a formal written contract, but it’s an implied agreement between the two parties that clears up expectations from the beginning. In terms of investing, implied contracts play a crucial role.
For instance, when investing in a company’s shares, the assumption is that the company will strive to increase shareholder value, accurately report financial performance, and comply with regulatory standards. Again, these expectations are generally not explicitly stated in a written agreement, but they represent an implied contract between the shareholder and the company.
Failing to meet the terms of these implied contracts can result in a loss of trust, legal actions, reduced share price, among other consequences. Therefore, implied contract serves to maintain transparency and trust among parties.
Examples of Implied Contract
Employment Agreements: In many cases, employers and employees may not have a written contract outlining the terms of their working relationship. However, an implied contract is formed through the employer’s actions, payment to the employee, and general habits or ‘policies’ within the workplace. For instance, if an employer consistently grants all employees a yearly bonus, a new employee could reasonably expect to also receive this bonus, even if it is not explicitly promised in writing.
Landlord-Tenant Relationship: The rental of property is often governed by written contracts, but when it’s not, an implied contract can be created. Suppose, for example, a person rents an apartment, pays rent monthly, but doesn’t have a written lease agreement. If the landlord accepts the rental payments under the understanding that the person will stay in the dwelling for a certain period, it forms an implied contract.
Paying for a Service: If you go to a restaurant and order a meal, you don’t sign a contract with the restaurant, but it’s implied that you will pay for the service received. The restaurant agrees to provide a service (preparing and serving a meal) with the understanding that the customer will provide compensation in exchange for that service. This forms an implied contract.
FAQs on Implied Contract
What is an Implied Contract?
An implied contract is an agreement that is not written or spoken explicitly but is rather inferred from actions, circumstances, intentions, or the laws themselves. It has the same legal force as an express or written contract, albeit they might be harder to prove.
What are the Types of Implied Contracts?
Implied contracts can be subdivided into two types, namely, implied in-fact contracts and implied in-law contracts. Implied in-fact contracts arise from the behavior of the parties involved that suggests an agreement. On the other hand, implied in-law contracts, also known as quasi-contracts, are imposed by the law to prevent unjust enrichment.
Can you give an Example of an Implied Contract?
Certain employment circumstances can serve as an example of an implied contract. For instance, if an employer verbally suggests job security or promises a permanent employment status to an employee, this could constitute an implied contract. Another example is a business providing services without a written agreement, but regularly receiving payment for the same. Both are implied agreements based on behavior and understanding.
How is an Implied Contract Enforced?
Enforcement of implied contracts can be challenging due to their non-explicit nature. It often takes extensive investigation into the conduct and communications of the parties involved. Legal advice is often sought in these circumstances. Courts will consider a variety of factors in their enforcement, including clear and convincing evidence of the agreement, fairness, and the parties’ conduct.
What is the difference between Express Contract and Implied Contract?
Express contracts are based on explicit written or spoken terms, with all parties understanding the terms and conditions. Implied contracts, however, are formed through the conduct of the parties, with terms being suggested or inferred. Both have legal validity, but express contracts are often easier to enforce due to their explicit terms and conditions.
Related Entrepreneurship Terms
- Contract Law
- Express Contract
- Quasi-Contract
- Breach of Contract
- Contractual Obligations
Sources for More Information
- Investopedia: An excellent resource for all matters related to finance and business with many articles on contract law, including implied contracts.
- Legal Information Institute – Cornell Law School: This site offers a wealth of information on various aspects of law, including business law and contract law.
- LawDepot: This source provides easy-to-understand legal forms, including information regarding different types of contracts.
- Nolo: This website provides free legal information for consumers and small businesses, including in-depth articles on implied contracts.
