What are Tacit Contracts?

In contracts and agreements, not every term needs to be explicitly stated to be legally binding. Tacit contracts are a unique type of agreement where terms and mutual consent are derived from actions, conduct, and circumstances surrounding the parties involved. This article discusses the concept of tacit contracts, exploring the legal principles, types, examples, and implications of these contracts in commercial and personal transactions. Although not explicitly defined in the Indian Contract Act, 1872, tacit contracts are a reality in law, holding as much significance as written or verbal contracts.

What is a Tacit Contract?

A tacit contract, often referred to as an implied or inferred agreement, is not based on explicit terms set forth in writing or verbal consent. Instead, a tacit contract draws its enforceability from the conduct and actions of the parties involved. Such contracts can arise when parties display a mutual intention to enter an agreement without vocalising or documenting the terms. For example, in a shop, when a customer places an item on the counter and hands money to the cashier, it implies that the customer agrees to buy the item and the shop agrees to sell it.

In legal terms, tacit contracts are founded on “consensus ad idem,” or a meeting of the minds. They hold both parties accountable as if they had explicitly agreed upon the terms, provided that the actions reasonably demonstrate such an intention.

Tacit vs. Implied Contracts: Key Differences

Tacit contracts are often compared to implied contracts. However, while both lack explicit articulation of terms, tacit contracts draw from the conduct of the parties alone. Implied contracts, as described in Section 9 of the Indian Contract Act, 1872, are established based on the overall intention, conduct, or actions. An implied contract does not require any written or verbal acknowledgement, as seen when a customer dines at a restaurant and is expected to pay for their meal.

Why Tacit Contracts Matter in Law

In many scenarios, tacit contracts serve as the foundation for transactions where formalities might be redundant or impractical. Tacit agreements allow legal recognition of transactions where a written or verbal contract might not be feasible. These contracts are vital across sectors like retail, hospitality, and online commerce, where customer behaviour or norms of engagement imply agreement without explicit terms.

Legal Foundations and Recognition of Tacit Contracts

While tacit contracts are not explicitly defined under Indian law, they fall under the umbrella of contracts derived from common law principles. Judicial interpretations and precedents play a significant role in recognising and enforcing tacit agreements, and courts evaluate cases based on conduct, implied intention, and reasonableness.

Courts often rely on case law and interpretative tests to establish the validity of tacit contracts. In the South African case of Starways Trading v. Pearl Island Trading (2018), the court evaluated tacit terms in the context of a sugar supply contract, ruling that certain terms implied by law applied to the agreement, even without explicit agreement by the parties.

Tests to Determine the Existence of Tacit Terms

To verify the presence of tacit terms in a contract, several tests have been established:

1. Official Bystander Test: Would a neutral party consider the term an essential part of the contract if asked?
2. Business Efficacy Test: Does the term make the contract viable for commercial purposes?
3. Reasonable Person Test: Would a reasonable person assume that the term applies based on the conduct and circumstances?

Types of Tacit Terms in Contracts

Tacit terms in contracts can be broadly categorised as follows:

Terms Implied by the Intention of the Parties

These terms arise from the intention of the parties involved. Although they may not have been explicitly discussed, the parties’ actions or the nature of their relationship imply mutual consent to these terms. For example, in a landlord-tenant relationship, the tenant is implicitly responsible for maintaining the rented premises in reasonable condition.

Terms Implied by Law

Certain terms are automatically applied to a contract by law, even without explicit mention, unless excluded. The principle of caveat emptor or “let the buyer beware” in commercial law implies that a buyer accepts the condition of goods as they are unless otherwise specified.

Terms Implied by Trade or Industry Practice

In specific industries, certain terms are considered standard and are thus implied in contracts. In the shipping industry, for instance, it’s standard practice that the shipowner maintains the ship’s seaworthiness. These terms are assumed to be a part of the agreement, based on established customs and trade practices.

Approaches to Establishing Tacit Contracts

Various theoretical approaches help courts and legal professionals establish the presence of tacit contracts:

Traditional Approach

Under the traditional approach, a tacit contract requires unequivocal conduct from both parties, clearly indicating an agreement. The conduct must demonstrate mutual awareness of the circumstances and the intent to form a contract. This approach stresses that tacit contracts must extend only to the involved parties and that both should fully comprehend the agreement.

Objective or Modified Declaration Theory

The modified declaration theory posits that a contract may be inferred from facts when an explicit declaration of intentions is missing. Courts infer intention from the conduct, particularly if one party denies enforceability despite actions implying agreement. Here, objective facts play a crucial role in determining the implied consent.

Reliance Theory or Doctrine of Quasi-Mutual Assent

This theory holds that even without mutual consent, conduct that leads one party to reasonably believe an agreement exists may bind the other party. The English case Freeman v. Cooke (1848) established that a party could be held liable if their conduct implied consent, even without explicit agreement. This theory is closely tied to the concept of estoppel, where one party cannot deny an agreement if the other reasonably relied on their conduct.

Estoppel in Tacit Contracts

The doctrine of estoppel prevents a party from retracting consent if the other party has relied on the inferred agreement. Estoppel applies when representations or promises made by one party lead the other to act in reliance upon them. Estoppel protects contractual integrity by ensuring that parties cannot deny consent without cause, especially when reasonable reliance is involved.

Practical Examples of Tacit Contracts

Tacit contracts appear in various real-life scenarios, where conduct and industry norms suggest terms and obligations:

• Restaurant Service: When a customer enters a restaurant and orders food, a tacit contract implies they will pay for the meal.
• Taxi Services: When a passenger boards a taxi and specifies a destination, a tacit agreement implies that they will pay the fare upon reaching the location.
• Retail Purchases: Picking items from a store and proceeding to checkout implies consent to purchase and pay for the items.

In each instance, the contract is implied by conduct, with each party’s actions serving as the basis for mutual obligations.

Imputed Tacit Terms: Consensual vs. Imputed

Imputed tacit terms fall into two main categories:

1. Consensual Tacit Terms: These are terms the parties would have explicitly agreed upon had they been discussed.
2. Imputed Tacit Terms: These are terms that the parties would likely have agreed upon if they had been aware of the need for such terms.

The official bystander test, business efficacy test, and reasonable person test often help courts identify and apply these tacit terms.

Challenges and Considerations in Tacit Contracts

Tacit contracts can create ambiguity, leading to misunderstandings and legal disputes. Since there is no written or verbal articulation of terms, proving intent and enforcing tacit contracts can be complex. The onus lies on the party alleging the existence of a tacit term to prove it, often relying on conduct, industry standards, or the overall nature of the transaction.

Factors to Consider When Drafting a Tacit Contract

While drafting tacit terms, clarity is crucial to avoid future disputes. Some essential factors include:

• Surrounding Circumstances: Evaluate the context to infer terms that naturally fit the nature of the agreement.
• Intention of the Parties: Courts assess intent based on the parties’ conduct and how it aligns with the nature of the contract.
• Industry Standards: Established norms in a specific industry play a role in tacit terms, especially if they are standard practice.

Applying tests like the official bystander test, business efficacy test, and reasonable person test is crucial when drafting contracts to ensure that unspoken but essential terms are considered.

Legal Implications of Tacit Contracts

Tacit contracts, like express contracts, create binding obligations, and breaching a tacit contract can result in legal consequences. For instance, in employment, the duty of loyalty and confidentiality is often implied even if not explicitly mentioned in a contract.

Conclusion

Tacit contracts form an indispensable part of legal and commercial transactions, accommodating agreements in contexts where verbal or written consent may be impractical. Recognising tacit terms allows for flexibility in contracts, ensuring that parties fulfil obligations implied through conduct and surrounding circumstances. Courts play a pivotal role in interpreting these contracts, ensuring justice by considering reasonable actions, industry standards, and inferred intent.

For businesses, understanding tacit contracts helps prevent disputes, especially when dealing with service or sale transactions that lack explicit agreements. As legal recognition of tacit contracts grows, especially in the context of digital transactions and online marketplaces, companies and individuals should be mindful of their conduct and implied obligations in each engagement.