Implied terms

Bou-Simon v BGC Brokers (Court of Appeal) [2018]

Another case focussing on the rules governing when terms will be implied into a commercial contract. This case had an interesting twist as the court had to consider the relevance of words that had been deleted in previous drafts of the agreement during the negotiation process

Facts:

The defendant had joined the claimant firm of brokers as an employee with the intention of also becoming a partner. On joining the firm, the parties entered into an agreement by which the claimant loaned the defendant £336,000. The loan was to be repaid from the defendant’s partnership distributions and the agreement provided that if he ceased to be a partner after having served four years at the firm, any loan amount outstanding would be written off. In fact, the defendant did not end up becoming a partner. When he left within four years of joining the firm, the firm sought repayment of the loan.

The relevant express wording in the Loan Agreement said “The Loan is payable by the Lender within thirty (30) days of [Bou-Simon] becoming a partner in the Partnership (as defined below) or within thirty (30) days after the parties' execution of this Agreement whichever shall be the later”. It then went on to say “[Bou-Simon] agrees that he will repay the Loan from net partnership distributions until the Loan is repaid in full. If [Bou-Simon] ceases to be a partner any unpaid amounts will be written off only if [Bou-Simon] has served at least [4 years]”.

To further complicate matters a previous draft of the Agreement contained clauses which expressly required Bou-Simon to repay the Loan in full if he did not become a partner. Those clauses were deleted during the course of negotiations. The question arose as to what impact that deletion should have.

Decision:

The High Court found in favour of the claimants, that a term should be implied into the agreement that the loan would repayable simply if the defendant left the firm within four years. On appeal, however, the Court of Appeal found the reverse and that the defendant was not, in the circumstances, liable to make a repayment.

The Court of Appeal found that the High Court judge had begun from the wrong starting point. Whether a term should be implied into the contract should not be looked at in light of what had actually happened with the benefit of hindsight (the claimant having not become a partner and having left within four years). The court should first construe the express terms of the agreement. Only after the process of construing the express words of a contract is complete does the issue of an implied term fall to be considered. A term should only be implied if that term is either so obvious that it goes without saying or if without that term the contract would lack commercial or practical coherence.

The implied term was not so obvious as to go without saying and the contract did not lack commercial or practical coherence without it.

According to the leading judge, “The [High Court] judge succumbed to temptation…. The judge implied a term in order to reflect the merits of the situation as they now appear”.

On the relevance of words deleted from drafts during the course of negotiations the judge concluded that “other than in very unusual circumstances or where deletions have been relevant to the process of interpretation… deletions are unlikely to be relevant to the process of implication”.

Points to Note: