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.
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  will be of interest to anyone involved in the negotiation of commercial contracts.
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.
In accordance with the leading case of M&S v BNP Paribas  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.
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.)
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:
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.
  EWCA Civ 1525
  UKSC 72