Say what you mean – Ioannis Alexopoulos and Jessica Thomas

The saying goes that "hindsight is notably cleverer than foresight"[1]. However, in a recent case, the Court of Appeal warned against the use of hindsight to imply a term into a contract merely because it appears to be fair. In this article Ioannis Alexopoulos, Partner, and Jessica Thomas, Associate, consider the case of Robert Bou-Simon v BGC Brokers LP[2] and highlight the three important takeaways from the Court of Appeal's judgment.

The law of implied terms allows the court to imply a term into a contract to cover a situation which has not expressly been provided for in writing.  In the case of Robert Bou-Simon v BGC Brokers LP, the Court of Appeal confirmed that when implying a term into a contract, the question should be approached from the perspective of the reasonable reader of the agreement, knowing all the provisions and the surrounding circumstances at the time the agreement was made.  

The Facts

Mr Bou-Simon and his employer, BGC Brokers LP ("BGC") entered into an agreement in December 2011 (the "Agreement"). Under the Agreement, Mr Bou-Simon was paid the sum of GBP 336,000 (the "Loan").  The Loan was to be repaid from any partnership distributions made to Mr Bou-Simon.  If Mr Bou-Simon ceased to be a partner, any unpaid amounts would only be written off if he remained in his employment for a minimum of four years.

Mr Bou-Simon commenced his employment for BGC on 1 February 2012 as a "broker" – it was the intention of all parties that he would latterly become a partner. The Loan was paid in full to Mr Bou-Simon on 21 February 2012.

Mr Bou-Simon subsequently resigned just over a year later.  Prior to commencement of the proceedings, it was assumed that Mr Bou-Simon had become a partner but it transpired that the necessary documentation was never signed and he did not.

BGC contended, irrespective of the fact that Mr Bou-Simon never became a partner, that a term should be implied into the Agreement providing that the Loan would be repayable in full where Mr Bou-Simon failed to serve a full four-year term of employment (the "Implied Term").  Mr Bou-Simon's position was that the payment was a "golden hello" and that he was not obliged to repay it upon resigning from BGC.

In addition, the Agreement also contained terms which were deleted as a result of negotiation, and which related to the circumstances in which the Loan would become immediately repayable.

The Court of Appeal's Decision

At first instance the trial judge found in favour of BCG, deciding that the Implied Term should be given effect. Mr Bou-Simon appealed this decision and the Court of Appeal allowed his appeal.

The Court of Appeal found that the trial judge had erred in finding that the Implied Term put forward by BGC should be implied:

• In her leading judgment, Lady Justice Asplin noted that the trial judge had approached the question of implying terms from the wrong starting point; he construed the Agreement in order to fit the Implied Term rather than beginning with the express terms themselves. In doing so, he failed to follow the appropriate approach laid down by Lord Neuberger in Marks & Spencer v BNP Paribas Securities^[3] (i.e. only once the process of construing the express words of a contract is complete can the issue of implied terms then be considered).

• The Court of Appeal confirmed that hindsight should thus not be applied when considering whether a term should be implied. Instead, the obvious intentions of the parties at the time of contracting must be looked at.  Terms may be implied to achieve business efficacy, but only where there is an obvious lacuna in the agreement which must be filled.  The Agreement lacked neither commercial nor practical coherence which the Implied Term was required to remedy.

• Lady Justice Asplin concluded that the reasonable reader would consider that the Agreement was concerned with a loan to be made in the circumstances in which Mr Bou-Simon became a partner and either served the initial period of four years or ceased to be a partner during that time. There was nothing uncommercial or absurd about a limited recourse loan and the Agreement would have required substantial re-drafting to allow for repayment of the Loan as contended by BGC.

The Court of Appeal also considered, as obiter, the admissibility of deleted words from draft agreements when determining whether a term should be implied into a contract:

• Lady Justice Asplin found that the deletions from previous drafts were not sufficiently similar to the Implied Term to render them relevant or admissible. She held that it would only be appropriate to have taken the deleted terms into account in the implication process if they could be characterised as part of the relevant surrounding circumstances and not merely part of the course of negotiations.

• Lord Justice Singh, however, was careful to leave open the question whether such deletions are admissible, noting that deleted terms which negative the implication of a term in the form of deleted words could well have a bearing on the question of whether the test for implication of a term into a contract has been met. His finding was based on the fact that a joint decision must have – at some stage during the negotiations – been made to delete words from an agreement, which one party is now attempting to re-instate unilaterally.

Are we clear?

The decision in Robert Bou-Simon v BGC Brokers LP serves as a useful reminder on the law of implied terms and provides further clarity as to the starting point for determining whether a term should be implied into a contract or not. Here are the three important takeaways from the Court of Appeal's decision:

1. The correct test for construing implied terms into a contract is as set out in Marks & Spencer Plc v BNP Paribas. In short, the test is whether a reasonable person reading the contract at the time it was made, and not at the time of the dispute, would consider the term to be so obvious as to go without saying or to be necessary for business efficacy.

2. If parties want something included in a contract, they should do so as explicitly as possible. The test for implying terms is narrow, objective and separate from interpretation – in this instance, foresight is better than hindsight.

3. Parties should also be wary of attempting to imply terms which may have been deleted from previous drafts of an agreement. This issue was deliberately left open by the Court of Appeal in this instance to allow for an authoritative decision in a later case, but the obiter comments outlined above are likely to be persuasive.

[1] Chester W. Nimitz

[2] [2018] EWCA Civ 1525

[3] [2016] AC 742