Implied terms have to clear many hurdles to pass muster in court – as a recently overturned decision illustrates, explains Shaun Tame and Hannah Evans.
A recent case is a reminder to commercial parties to expressly include all terms necessary in their agreements.
The court is bound by stringent rules about when additional terms can be implied into a contract: it will not come to the rescue of parties and imply terms that were not expressly agreed by the parties themselves. To be implied, a term must be necessary to enable the agreement to work: its reasonableness alone is not enough.
In Robert Bou-Simon v BGC Brokers LP  EWCA Civ 1525, the court considered whether it was appropriate to imply a term into a loan agreement between Mr Bou-Simon, a financial broker, and his former employers, BGC Brokers LP (BGC). The dispute related to whether a payment of £336,000 made to Mr Bou-Simon under the loan agreement was repayable to BGC when he resigned.
The agreement provided for the repayment of the £336,000 if Mr Bou-Simon ceased to be a partner within the full ‘initial period’ (four years). In fact, he never became a partner - but the agreement did not cover the repayment of the £336,000 if he resigned as a non-partner.
He asserted that the £336,000 was a ‘golden hello’ which was not intended to be repaid. BGC argued that a term should be implied into the agreement that the £336,000 was a loan and repayable unless he had worked for the initial period (which he had not).
The High Court agreed with BGC. Mr Bou-Simon appealed on the basis that the judge had incorrectly applied the law on implied terms.
Court of Appeal reversal
The Court of Appeal upheld Mr Bou-Simon’s appeal, finding that the High Court judge:
- was wrong to imply a term into the agreement to reflect the merits of the situation as they now appeared;
- did not review the express terms before considering whether a term should be implied (construing the agreement to fit the implied term being the wrong approach).
In addition, the Court of Appeal reiterated established law that it is inappropriate for a judge to apply hindsight – or to give effect to a clause that the parties say they would have agreed if they had thought of it at the time of contracting.
It also decided that it was perfectly possible for the loan agreement not to cover the actual circumstances and still be functional.
Importantly, the Court of Appeal restated the principle that a term will only be implied into a contract if a notional reasonable reader of a contract, knowing all its provisions and the surrounding circumstances, would understand it to be implied – but only if that reasonable reader:
- is treated as reading the contract at the time it was made (and therefore the question of whether an implied term is made is judged on the basis of the circumstances at the time the contract is made);
- would consider the term so obvious as to go without saying, or to be necessary for business efficacy to make the contract work.
The appeal decision held that the term implied by the High Court judge did not meet the above criteria. The agreement did not need the implied term to be effective: the loan could be construed as a limited recourse loan, repayable in limited circumstances only.
The Court of Appeal rejected Mr Bou-Simon’s attempt to rely on clauses deleted during the negotiations from drafts of the agreement to prove that the parties had agreed not to include a repayment term covering the situation which arose.
Finding it unnecessary to consider those ‘deleted’ clauses, the court commented (probably in passing) that clauses deleted from drafts of a finalised agreement could only be admitted as evidence when construing ambiguous ‘final’ clauses: this is a different legal exercise from deciding whether a term should be implied into the contract.
Why courts take a strict approach
The court is bound by strict rules when considering implied terms. This is for a good reason: it is being asked to deal with matters that the parties made no provision for.
This is an intrusive step into the parties’ affairs. The court must examine the express terms first to ascertain whether the contract works as it is. It cannot stretch the facts to close gaps in the parties’ agreement.
- Ensure that all key terms are made express terms of the contract so that they reflect the ‘agreement’ between the parties.
- Remember that a term will only be implied as a matter of strict necessity. What appears to be commercial common sense may not be recognised legally. Do not assume that a term agreed orally in negotiations, or that formed part of earlier draft documents, is an implied term. When in doubt, set out key provisions expressly and in writing.
- Check all changes made to earlier drafts and check carefully whether any key provisions have been deleted, either deliberately or inadvertently. Only in unusual circumstances will the court take into account what has been deleted from a contract when considering implied terms.
Shaun Tame is counsel and Hannah Evans is an associate at Dentons