Without the benefit of hindsight: Interpreting and implying contractual terms

24th October 2018

Managing Partner and Commercial Dispute Resolution specialist Malcolm Simpson highlights key messages to come out of recent Court of Appeal case on interpreting and implying contractual terms.

What if a contract doesn’t say what it should?

Whether or not a contract says what or all it should can be fertile ground for dispute. The issue can be exacerbated by the longevity of many contractual arrangements and the divergence, over time, of parties’ commercial interests.  The interpretation and potential implication of contractual terms continue to keep litigators busy, and comments made by the Court of Appeal in Bou Simon v BGC Brokers LLP [1] will be of interest to anyone involved in the negotiation of commercial contracts.

Interpreting and implying contractual terms

The contract in question expressly stated that Mr Bou-Simon would repay a loan if, within a certain time, he ceased to be a partner in the business. However, in fact, Mr Bou-Simon was only an employee and left the business before ever becoming a partner. (As happens so often, the contract had been prepared on the basis of the parties’ general understanding and aspirations at the outset of a business arrangement – it had not been tightly and correctly drafted so as to reflect the actual commercial reality.)

At first instance a trial judge implied a term requiring Mr Bou-Simon to repay the loan. However, the Court of Appeal found that the trial judge had fallen into the trap of implying a term to give effect to the merits of a situation with the benefit of hindsight, whereas that is not the correct legal test.

What is the test?

In accordance with the leading case of M&S v BNP Paribas [2] the Court of Appeal in Bou-Simon made the crucial point that the interpretation of express terms must be undertaken before any question of whether a term should be implied even arises.  Only if a reading of the express terms reveals that implication of a term is necessary to give business efficacy to the contract should the court then go on to consider, by reference to the hypothetical approach of reasonable people in the position of the parties at the time the contract was made, the presumed intention of the parties (and therefore implying a term to give effect to that).

Here, the employer’s case failed at the first hurdle when the Court of Appeal held that it was not necessary for the efficacy of the particular contract for the proposed repayment term to be implied.

What about deleted terms?

In this case, a term along the lines of the proposed repayment term had actually been included – and then deleted – from a travelling draft of the contract. Contract negotiators and drafters will be interested in the Court of Appeal’s explanation that in relation to a contract interpretation exercise, deleted terms should only be taken into account where express terms are ambiguous.  When it comes to the question of whether to imply a term, the fact that a similar term has been deleted cannot be relied on to rebut an implication.  Rather, deleted terms are only admissible if they form part of the relevant surrounding circumstances, and not if they were merely part of the to-ing and fro-ing of contractual negotiations.  (It is unfortunate, however, that the Court of Appeal did not clarify the meaning of those two alternatives.)

Key takeaways for commercial contracts

Keeping in mind the following key takeaways should help contract negotiators/drafters to ensure that their commercial contracts say what and all they should, thereby minimising the risk of an interpretation or implication dispute later down the line:

• At the outset of most commercial arrangements, parties are enthusiastic and invariably believe that their aspirations and interests align. Even where that is true, and no matter how close and positive the relationship, it is important to remember that contracting parties’ interests and understanding can differ and diverge.
• It is therefore vital that contracts are drafted clearly, accurately and comprehensively and that they expressly contain, in unambiguous language, all necessary terms to reflect the parties’ agreement.
• The implication of terms into commercial contracts is potentially intrusive, such that the court will not imply terms lightly. In order for a term to be implied, it must be necessary to give business efficacy to the contract. The test is not an absolute one, but it is a high bar which asks whether, without the term, the contract simply does not work, either commercially or practically.
• Remember that only if ‘necessary’ test is met, will the court consider the presumed intention of the parties at the time the contract was made, and whether an implied term is needed to give effect to that.
• In addition, for a term to be implied, it must be obvious; capable of clear expression; and must not contradict any express term of the contract.
• Where the parties have entered into a lengthy, carefully drafted contract, particularly where they have been legally advised, it will be difficult to imply any term(s) as it will be doubtful whether any omission was the result of the parties’ oversight or a deliberate decision.
• Note that hindsight and merits are irrelevant, and that deleted draft terms may or may not be relevant, depending on the circumstances of the particular case. Parties cannot therefore rely on any of those things to retrospectively correct bad drafting.

If you would like any advice or assistance in connection with any of your commercial contracts – whether at the negotiation/drafting stage or where a dispute has arisen – please do not hesitate to contact Malcolm Simpson or any member of the Commercial Dispute Resolution Team.

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[1] [2018] EWCA Civ 1525
[2] [2015] UKSC 72