Implied terms at the forefront: restrictions on their applicability

A recent Court of Appeal decision serves as a reminder of the limited circumstances in which a term can be implied into a commercial contract.

In Bou-Simon v BGC Brokers LP, it was decided that a contractual term cannot be implied into a contract simply because it appears to be fair or because it seems likely that the parties would have agreed to it if it had been suggested to them. The Court of Appeal also made some interesting observations in relation to the admissibility of deleted contractual provisions.

Facts of the case

Mr. Bou-Simon entered into a loan agreement with BGC, a firm of brokers, prior to commencing his employment with them on 1 February 2012, with the intention of also becoming a partner in the firm.

The agreement provided that BGC would loan Bou-Simon £336,000 which would be payable within 30 days of Mr. Bou-Simon becoming a partner or within 30 days of execution of the agreement (whichever was later). The loan was to be repaid over time from Mr. Bou-Simon's partnership distributions. The agreement also stated that any outstanding amount was to be written off if Mr Bou-Simon served at least/ceased to be employed for an "Initial Period" of 4 years from the commencement date of his employment (i.e. 4 years from 1 February 2012). In addition, the loan would become immediately repayable, if a material impairment of Mr. Bou-Simon's creditworthiness occurred (such as insolvency).

The loan was advanced to Mr. Bou-Simon, who did not become a partner in BGC (because the necessary documents had not been signed) and who resigned just over a year after he joined. The agreement was silent as to whether the loan was repayable in such circumstances and BGC sought to recover the loan in full on the basis that there was an implied term in the agreement requiring repayment in full if Bou-Simon failed to serve the full four-year period.

The High Court ruled in favour of BGC, accepting that the term should be implied into the agreement. It considered that, without the implied term, the agreement would lack commercial or practical coherence because this would mean that Mr. Bou-Simon could keep the money even if he left BGC within a short time without making a significant contribution to BGC. Mr. Bou-Simon appealed on the basis that the legal test to be applied for implying a term into a contract had been applied by the High Court in the wrong way.

Court of Appeal decision and analysis

The Court of Appeal overturned the High Court's judgment, finding that there was no implied term in the agreement. In reaching this conclusion, it reiterated the conditions that must be satisfied for a term to be implied into a contract (as set out in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742), which are as follows:

• A term will be implied if a reasonable person reading the contract at the time it was made would consider it to be so obvious as to go without saying or to be necessary for business efficacy.
• A term should not be implied merely because it appears fair or one considers that the parties would have agreed to it if it had been suggested to them.
• The express terms of the contract and the surrounding circumstances at the time the contract was made should be taken into account.
• The question of whether a term should be implied into a contract should be considered after it has been determined what the parties have expressly agreed.
• A term should be implied into a contract if, without it, the contract would lack commercial or practical coherence.

It was held that the High Court erred in that it implied the term in question in light of what actually happened (i.e. Mr- Bou-Simon having left BGC before the end of the initial four-year period). It did not embark on first construing the express terms of the agreement and then implying the term if it was so obvious as to go without saying or to be necessary for business efficacy. The Court of Appeal also emphasised that it was not appropriate to apply hindsight and seek to imply a contractual term simply because it seems fair or because it appears to be likely that the parties would have agreed to it if it had been suggested to them.

According to the court, a reasonable reader, looking at the express terms of the agreement at the time it was made, would consider that the agreement envisaged that a loan would be made to a partner and would be repaid from the partnership distributions. The court commented that there was no lack of practical coherence in the agreement and there was nothing uncommercial or absurd about a limited recourse loan of the type provided for in the agreement (this is indicated in paragraph 21 of the Court of Appeal's decision). 

The situation which arose was outside the scope of the agreement, as envisaged at the time of drafting. As such, the implied term would not be so obvious as to go without saying and the contract did not lack commercial or practical coherence without it.

Relevance of deleted provisions

An earlier draft of the agreement contained provisions similar to the term in question (which were proposed at the drafting stage but were then deleted). According to Mr. Bou-Simon, the deleted provisions demonstrated a clear intention by the parties not to include the term in the agreement. The Court of Appeal did not decide on this point but made some observations.

Lady Justice Asplin stated that deleted provisions should only be admitted for the purpose of implying a term into an agreement in specific circumstances (such as where they are relevant for the process of interpreting the express terms of the agreement and therefore affect what the reasonable reader would consider obvious or necessary for business efficacy).

Lord Justice Singh suggested, however, that a wider approach may be justified, noting that the deletion of provisions from a previous draft of the contract (which are the same as the term seeking to be implied) "could well have a bearing on the question whether the test for implication of a term into a contract has been met".

Comment

This case confirms the restrictive approach the courts will take to implying terms into a contract. The message is clear: a term will not be implied into an agreement because, with hindsight, it would be fair to do so. 

Following the test set down in the Marks and Spencer case, the court will first objectively construe the express terms of the agreement and then consider whether the implied term is strictly necessary for commercial or practical coherence or so obvious that it goes without saying.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions