What are Implied in Fact Contracts?
Implied in Fact Contracts are those agreements that stem from parties conduct, rather than the express terms of a contract. An Implied in Fact Contract is one where: Parties will tend to enter into Implied in Fact Contracts when they have conducted business together for a period of time and have a clear understanding of what is expected from each party. Indeed, the level of understanding that must be had between each party depends on the relationship they have developed over time. For example, if two parties have been doing business with one another for two years without a written contract, but they clearly understand the terms of their agreement , then they will have a solid basis to form an Implied in Fact Contract in the event one party breaches a contract term. It is important to note that simply because the parties do not have a written contract does not prevent a court from finding the existence or breach of a Implied in Fact Contract. As to the scope of such contracts, the duties and obligations contained within an Implied in Fact Contract will depend on the parties conduct leading up to the formation of the contract. For example, if the parties have performed the terms of a contract in the past but do not have a written agreement, then the Implied in Fact Contract could form terms as to: price, delivery, quality of good(s) to be delivered, payment terms, etc.
Legal Requirements for an Implied in Fact Contract
To establish an implied in fact contract, i.e., a contractual agreement inferred from conduct or from other facts of the case, a party must show mutual intention by the parties to contract. The defendant’s conduct must further suggest to a reasonable person that the parties intended to enter into an agreement. Under the reasonably prudent person standard, an individual possessing the same knowledge and background as the party determined to be liable must regard the actions of the party in question as having occurred pursuant to a contract. Such an agreement need not be established by specific words, however, because it may arise from conduct demonstrating that the parties intended to be contractually bound. In determining whether a contract has been created in such instances, courts will look at surrounding circumstances, the relationship of the parties, and their conduct.
Common Reasons for a Breach
There are many situations in which an implied in fact contract may be breached, most of which involve the failure to complete a task, deliver a product, or act within custom or practice. For example, you may contract with your corporate secretary to manage important documents for the business, only to find that she has not completed the task and cannot readily locate the documents in her possession. Likewise, if you require employees to clock in and out for lunch breaks, they must return to their posts within the time agreed or face disciplinary measures. If they clock out early or return late, you may have grounds to terminate the employment contract based on a breach.
Some business contracts may contain stipulations for how work is to be performed. If an employee deviates from that plan, it could leave the company open for claims of a breach of implied contract. For example, warehouse workers entering into implied in fact contracts with their employer must adhere to the safety rules mentioned above, as well as other rules and guidelines set forth by company policy or common practices for warehouse management. Most employees will abide by the agreement because they want to keep their jobs. However, if the company suddenly begins to disregard its own safety practices and ignores close calls and unsafe conditions, the workers may choose to organize and demand that the company adhere to those rules. In that case, the workers cannot be terminated for their insistence that the company follow its own safety policies.
Enforcement of a Breach
Breach of an implied in fact contract can result in various legal significant consequences. Like any breach of contract, where one party fails to live up to its end of the agreement, this remains true for breach of an implied in fact contract. The non-breaching party typically has remedies available under applicable law.
One such possible remedy is recovering money damages. For monetary damages to be awarded, they must be proven and relate to the actual loss suffered by the non-breaching party. An example of this is a lost profit claim based on sales lost because of the breach of the implied in fact contract.
Another remedy may include equitable relief in the form of specific performance. Specific performance requires the breaching party to perform as it promised in the implied in fact contract and , thus, place the non-breaching party in the position it would have been in had the breach not occurred. Specific performance, however, is an equitable remedy and as such it is only available when the monetary damages awarded will not be sufficient to make the non-breaching party whole. As such, it may be available where the subject matter of the contract is unique or if the non-breaching party would be placed in a worse position by having to find substitute performance than what it was entitled to under the implied in fact contract.
Demonstrating a Breach at Trial
If you find yourself facing an implied in fact breach of contract litigation, it is important to understand how you may be able to prove your case in court. Many implied in fact contract disputes require the use of witnesses and other evidence in order to fully support the contractual obligations of the parties and the existence of the contract. Witnesses may be called to provide statements regarding the behavior of each party to the contract. Character witnesses may be called to show that a particular party was acting in good faith during the transaction with the other party, or that a party was under duress to sign the contract without a choice. Character witnesses are often brought in when one party wants to establish that the other was behaving in such a way that it damaged or nullified the contract. Evidence such as e-mail correspondence, letters, and actual signed contracts may be provided to the court by each party. Each party should come to court prepared with documents pertaining to the contract, including all documentation that is pertinent to the contract. It’s also wise to provide supporting paperwork that relates to the violations of contract by one or the other party when possible. Additionally, most judges will provide an opportunity for both parties to speak before the court under oath about the situation in question, so the parties should be willing to back up their claims about agreements made up until that point and in violation of the terms of the contract.
Preventative Steps and Best Practices
A critical preventive measure is simply to be mindful of the fact that conduct may give rise to an implied in fact contract. Both parties should be clear to state that they are not entering into an enforceable agreement until the terms are clearly set forth in writing, signed by both parties, and formal consideration has been exchanged.
If entering into a business relationship (e.g., employer/employee, landlord/tenant, supplier/customer), it is generally a good idea to have everything about the business relationship memorialized in a writing. If it is going to be a complicated business relationship, it is usually a good idea to spell out all of the terms and conditions in detail before any expenditure of significant time or money. If there is an oral contract that subsequently is reduced to written form , it is wise to include a provision stating that the written contract is the full and complete agreement of the parties and that any prior oral or written agreements are merged into the written agreement.
If you are in a business relationship with someone, and you intend the relationship to continue indefinitely, it is a good idea to have a written contract with your partner, that is signed and dated by both parties, spelling out, among other things, the duties of the parties, the right to withdraw from the relationship, and the consequences of withdrawal. When the business relationship denies the existence of an agreement, stating the opposite is not recommended, and is likely not helpful, no matter how frustrated you are by the other party’s conduct. It may be possible to write a letter to the other party stating your position, but a categorical denial or just suggesting that someone should stop claiming the parties have a contract is not advisable.