QCR Autumn 2018: The Court of Appeal provides more guidance on implied terms: Hindsight not to be applied to imply a term - Objective test of ‘the reasonable reader’

QCR Autumn 2018: The Court of Appeal provides more guidance on implied terms: Hindsight not to be applied to imply a term - Objective test of ‘the reasonable reader’

Bou Simon v BGC Brokers LLP [2018] EWCA 1525 (Civ)

Facts

BGC employed Mr Bou-Simon as a broker with the intention that he would become a partner. As part of their agreement, BGC loaned £336,000 to Mr Bou-Simon which was to be repaid from any partnership distributions which were made to him. If he ceased to be a partner, any unpaid amounts would be written off provided he worked for BGC for at least four years. A previous draft of the agreement provided that the loan would become immediately due and payable to BGC if Mr Bou-Simon did not receive any partnership units or if he ceased to be partner within four years. However, these terms were deleted from the final agreement on Mr Bou-Simon’s behalf. Mr Bou-Simon resigned within four years and BGC claimed the full amount of the loan.

Judgement

At first instance, it was held that there was an implied term to the effect that the money would have to be repaid immediately if Mr Bou-Simon did not become a partner and left within the four years.

Mr Bou-Simon appealed the decision on the grounds that although the High Court judge had identified the correct test set by the Supreme Court in Marks & Spender Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] for the implication of contractual terms,  the judge did not apply the test properly.

The Court of Appeal agreed with Mr Bou-Simon holding that the first instance judge had implied this term to reflect the merits of the situation as they appeared at the trial and had not approached the issue from the perspective of ‘the reasonable reader’ of the agreement, knowing all its provisions and the surrounding circumstances at the time the agreement was made. The Court of Appeal found that the reasonable reader would not have considered the implied term either so obvious that ‘it goes without saying’ or that the term was necessary to give business efficacy to the agreement as without it, the agreement would lack commercial or practical coherence. It is not appropriate to apply hindsight and to seek to imply a term in a commercial contract merely because it appears to be fair or because one considers that the parties would have agreed it if it had been suggested to them. 

The first instance decision was therefore overuled.

Comments

This is another case which demonstrates the reluctance of the courts to interfere with the bargain that the parties have struck and restates the high threshold a party will have to overcome to convince the court that it is necessary to imply a term into the contract. Although, it may appear unfair that BGC could not recover the loan, the Court of Appeal indicated that the circumstances could have given rise to a claim in restitution, or for unjust enrichment, neither of which was pleaded in this case.

By way of reminder, the Supreme Court in Marks & Spencer restated the correct test for implying terms into a contract. In brief, a term may be implied if:

  • It is necessary to give business efficacy to the contract (or, put more simply, without it the contract would lack commercial or practical coherence) or that its need for inclusion is so obvious that it “goes without saying”
  • It is capable of clear expression
  • It does not contradict any express term of the contract
  • Notional reasonable parties would have agreed the term was needed
  • It passes the officious bystander test

Eventhough the appeal had been decided, the Court of Appeal attempted, obiter, to provide some clarification on the question of admissibility of deletions from a previous draft. According to Asplin LJ, even if the parties had agreed the deletion of a term which was identical to that which was now sought to be implied, this fact could not be relied upon in order to rebut the proposed implication unless the term was part of the relevant surrounding circumstances and was not merely part of the course of negotiations. 

Singh LJ, however, indicated that he saw force in the suggestion that deleted words may negate the implication of a term in the form of the deleted word. He differentiated between the process of implying a term and construing express terms. The fact that the deletions may not have been admissible for the purpose of construction may not be determinative.

Ultimately however, the Court noted that the issue of when, if at all, deleted words are admissible in this context is not straightforward and is best left for authoritative decision in another case in which it is necessary to decide the point.

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