Insight not hindsight: implying terms into commercial contracts

Posted by Katie Dyson

27-07-2018

In the recent case of Robert Bou-Simon v BGC Brokers LP [2018] EWCA Civ 1525, the Court of Appeal considered the test that must be met before implied terms may be introduced into a commercial contract.

Background

Mr Bou-Simon was employed by BGC, a brokerage firm specialising in financial instruments. Towards the end of 2011, it was agreed that Mr Bou-Simon would become a partner of BGC and the parties subsequently executed a number of contracts to that effect, including a loan agreement (the “Agreement”).

The Agreement provided that:

The Agreement made no provision for the repayment of the Loan in the event that Mr Bou-Simon left BGC without serving as partner for at least four years. Predictably, that is precisely what happened.

The Court was tasked with determining whether Mr Bou-Simon was required to pay the balance outstanding to BGC. BGC maintained that Mr Bou-Simon was required to repay the Loan pursuant to either an express term of the Agreement or a term which should be implied to that effect.

Mr Bou-Simon argued that, when the parties had entered into the Agreement, BGC had not required the Loan to be repaid other than via deductions from his net partnership distributions. He maintained that the Loan was essentially a golden handshake to induce him to join the partnership, and relied upon BGC’s willingness over the course of negotiations to delete a draft contractual term requiring its repayment from the Agreement.

At first instance…

The Court found that there was no express term in the Agreement which required the repayment of the Loan. It therefore applied the test established in Marks & Spencer plc v BNP Paribas Securities Services Trust Co Limited [2016] AC 742 for the implication of contractual terms – that is: whether a reasonable person reading the Agreement at the time that 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 rejected Mr Bou-Simon’s argument that the Loan amounted to a golden handshake and found that, without an implied term requiring the repayment of the Loan, the Agreement would lack commercial or practical coherence. On that basis, Mr Bou-Simon was ordered to repay the Loan.

On appeal…

The Court of Appeal considered that the Judge at first instance had “succumbed to the temptation” of implying a term in order to reflect the merits of a situation as it presently appeared. It reiterated that the Court must approach the interpretation of a contract from the perspective of the reasonable reader described in Marks and Spencer v BNP Paribas. It is thus not appropriate to apply hindsight and seek to imply a term into a commercial contract merely because it appears fair to do so.

Further, the starting point of interpretation must always be to construe the express wording of a contract – until the Court has established what the parties had agreed, it will be difficult for it to decide whether a term should be implied (and, if so, what that implied term should be). It appeared as though the Judge at first instance had instead construed the Agreement in order to fit with the term that he proposed to imply.

The Court of Appeal considered that a reasonable reader taking into account the express terms of the Agreement at the time that it was made would not consider the implied term so obvious as to go without saying, nor necessary for business efficacy such that the Agreement would lack commercial sense without it. The circumstances that had arisen were not just unforeseen by the express terms of the Agreement but were, in fact, out of its scope.

In the circumstances, the Judgment against Mr Bou-Simon was quashed and BGC’s claim was dismissed.

Obiter considerations

While the Court of Appeal were not required to consider the draft contractual terms that had been deleted from the Agreement over the course of negotiations, Asplin LJ nonetheless commented that such provisions would only be relevant to the interpretation of a contract in “very unusual circumstances”.

Interestingly, Singh LJ appeared to advocate a broader approach (albeit he acknowledged that the issue was “not straightforward”). In obiter comments, he suggested that the fact that a term had previously been deleted by the parties may have a bearing on the question of whether the test for its implication had been met.

Commentary

The Court of Appeal has once more demonstrated its reluctance to interfere with contracts reached between commercial entities. As ever, principles of fairness (typically only identified long after the terms of a contract have been agreed) do not entitle a contracting entity to re-write history.

In such scenarios, certainty is key. Commercial parties should therefore ensure when negotiating contracts that the proposed terms are sufficiently clear and encompass any situation that may reasonably arise. By doing so, they may avoid the need to engage in potentially damaging disputes, as well as the expense and uncertainty of litigation.


Share this Blog