Court of Appeal decision underlines high threshold for implying terms into a contract

The Court of Appeal has overturned a High Court decision to imply a contractual term into a loan agreement entered into between a brokerage firm and an intended partner in that firm, to the effect that the loan must be repaid if the individual did not serve an initial four-year term of employment: Robert Bou-Simon v BGC Brokers LP [2018] EWCA Civ 1525.

This case is a reminder of the strict approach which English courts adopt when asked to imply a term into a contract. It is necessary to construe the express terms of the contract before considering whether a term should be implied. The court may not apply hindsight, but must consider the position at the time the contract was formed. The court cannot imply a term simply because it seems fair or because the court considers that the parties would have agreed to it had it been suggested to them.

The Court of Appeal also made some interesting obiter comments about the admissibility of words which were included in a previous draft of the agreement but omitted from the final version. In particular, Lord Justice Singh observed that in the context of considering implied terms (as distinct from construing express contractual terms) he would not necessarily accept that there is an ambiguity threshold which must be satisfied in order for deleted words to be admissible.

Zoe Wood in our London dispute resolution team considers the decision further below.

Background

The defendant, Mr Bou-Simon, entered into a loan agreement (the “Agreement”) with the claimant, BGC, prior to commencing his second period of employment with BGC on 1 February 2012. It was understood that Mr Bou-Simon would become a partner in the firm and, before proceedings commenced, it was assumed that he had in fact become a partner. However, it turned out that he was not a partner because the necessary documentation had not been signed.

The Agreement provided that BGC would lend Mr Bou-Simon £336,000, payable within 30 days of Mr Bou-Simon becoming a partner or within 30 days of execution of the Agreement (whichever was later).

Clause 1 provided that Mr Bou-Simon would repay the loan from his partnership distributions. The clause stated: “In the event that [Mr Bou-Simon] ceases to be a partner any unpaid amounts will be written off by [BGC] only if [Mr Bou-Simon] served at least the full Initial Period as defined in [Mr Bou-Simon’s] employment contract”, ie 4 years from 1 February 2012.

Clause 2 provided that the loan would become immediately due and payable if a material impairment of Mr Bou-Simon’s creditworthiness occurred. An earlier draft of this clause provided that the loan would also become immediately due and payable if (a) Mr Bou Simon did not receive any partnership units; or (b) if at any time prior to the expiry of the “Initial Period” Mr Bou-Simon ceased to be a partner. These provisions were deleted on behalf of Mr Bou-Simon during negotiations and did not appear in the final Agreement.

On 21 February 2012, Mr Bou-Simon received £336,000 pursuant to the Agreement. On 3 June 2013, he resigned from BGC.

BGC sought to recover the loan plus interest on the basis that there was an implied term in the Agreement that “the Loan [£336,000] would become repayable in full where the Maker [Mr Bou-Simon] failed to serve the full term of the Initial Period” (the “Implied Term”). Mr Bou-Simon argued that there was no such Implied Term, the loan was a “golden hello” and he was not obliged to repay it when he resigned from BGC.

The High Court found that there was such an Implied Term on the basis that, without it, the Agreement would lack commercial or practical coherence because it would mean that Mr Bou-Simon could keep the money even if he left BGC within a short time without making any significant contribution to the business. The judge commented that if an officious bystander had asked the parties what would happen if the loan was made and the money received, but Mr Bou-Simon never become a partner and left BGC soon after, the parties would have answered: “Well, then, the money must be repaid on leaving.”

Mr Bou-Simon appealed.

Decision

The Court of Appeal allowed the appeal, finding that there was no such Implied Term in the Agreement. Lady Justice Asplin delivered the leading judgment with which Hickinbottom and Singh LJJ agreed.

There was no dispute as to the correct test for the implication of contractual terms in fact, as set out in Marks & Spencer Plc v BNP Paribas [2016] AC 742 (considered here) – essentially, whether a reasonable person reading the contract at the time it was made would consider the term to be so obvious as to go without saying or to be necessary for business efficacy.

The Court of Appeal held that, in this case, the judge had erred in that he “implied a term in order to reflect the merits of the situation as they now appear” rather than approaching the matter from the perspective of the reasonable reader of the Agreement at the time it was entered into. The Court of Appeal emphasised that it is not appropriate to apply hindsight and seek to imply a term in a commercial contract simply because it appears to be fair or because it seems likely that the parties would have agreed to it had it been suggested at the time the contract was formed.

The Court of Appeal also commented that the judge did not embark on the process of determining whether to imply a contractual term in the correct order. The judge construed the Agreement to fit the Implied Term, but the correct starting point is to consider the express terms of the contract. As pointed out in the Marks & Spencer case, the question of implied terms can be considered only after the process of construing the express terms of the contract is complete.

In the Court of Appeal’s view, the reasonable reader would consider that the Agreement dealt with a loan being made to a partner who either served an initial four-year period or ceased to be a partner during that time. There was no “lacuna” in the Agreement; the situation which arose was not covered because it was not within the scope of the Agreement. If the judge were correct, in addition to implying the contractual term, it would be necessary to re-draft the Agreement so that it applied even if Mr Bou-Simon was employed by BGC but never became a partner in the firm. The Court of Appeal commented that these circumstances may have given rise to a claim in restitution, but BGC did not plead restitution, the judge did not make a decision on it, and the question was not before the Court of Appeal.

Counsel for Mr Bou-Simon pointed to the fact that the parties had deleted similar provisions from an earlier draft of the Agreement to refute the suggestion that the Implied Term was so obvious that it went without saying. BGC argued that the deleted clauses did not assist, including because they did not mention Mr Bou-Simon ceasing employment (as opposed to ceasing to be a partner) and in any event they were inadmissible to assist with construing the Agreement.

The Court of Appeal did not need to make a decision about the admissibility of the deleted words and did not hear full argument on this point. However, Lady Justice Asplin and Lord Justice Singh made some interesting obiter comments about this issue. Lady Justice Asplin suggested that, apart from in very unusual circumstances, deletions are unlikely to be relevant to the process of implication. However, Lord Justice Singh saw “force” in the suggestion in Lewison, The Interpretation of Contracts (6th ed.), that “the consideration of deleted words may negative the implication of a term in the form of deleted words”. The fact that the words sought to be implied into a contract were deleted from an earlier version of that contract could affect whether the test for implication is met, which is separate from the exercise of construing the express terms of the contract. In addition, Lord Justice Singh observed that he would not necessarily accept that, in the context of implied terms, there is a threshold requirement of ambiguity in order for words which are deleted from an earlier draft contract to be admissible.

Zoe Wood
Zoe Wood
Associate (Australia)
Email
+44 20 7466 2518

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