Along with death and taxes, if there is one thing for certain it will be that the courts will continue to wrestle with issues of contractual interpretation on a regular basis. From time to time such decisions signal a substantive development in the law (or change of direction if you prefer), whereas others refine the process or comment upon particular aspects of the overall approach that the courts take in this often difficult area. One such recent case, which looked at a particular aspect of contract interpretation, was the decision of the Court of Appeal in Bou-Simon v BGC Brokers LLP ( EWCA Civ 1525).
Bou-Simon concerned the interpretation of an agreement made between Mr Bou-Simon and BGC Brokers. The question which the court dealt with was whether a particular term should be implied into the agreement. I will come to the precise wording of the implied term shortly.
The agreement in question governed the terms of Mr Bou-Simon's employment with BGC. At the time the agreement was entered into it was intended by everyone that Mr Bou-Simon would become a partner in BGC. Part of the agreement concerned a loan by BGC to Mr Bou-Simon which was to be made within 30 days of Mr Bou-Simon becoming a partner and subsequently repaid over time. The loan could also be repaid in full on demand if there was a "material impairment" of Mr Bou-Simon's creditworthiness. The agreement also confirmed that the balance of the loan would be written off only if Mr Bou-Simon ceased to be a partner after the expiry of an "Initial Period" of four years.
What actually happened was that the loan was advanced to Mr Bou-Simon, who was not in fact made a partner in BGC and who then resigned just over a year after he joined. Consequently a scenario arose which was largely unanticipated by the agreement. BGC alleged that the outstanding balance of the loan plus interest was due to be repaid, either as a result of an express term of the agreement or pursuant to an implied term. The implied term was that the loan "would become repayable in full where [Mr Bou-Simon] failed to serve the full term of the Initial Period". The Judge found that there was no express term and this finding was not appealed. The Judge also found that a term could be implied in the form set out above and awarded the sum to be repaid to BGC. Mr Bou-Simon appealed against that finding.
There was no real dispute about the test that the court should use when considering whether the term should be implied into the agreement. The test can be found in the decision in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Limited ( AC 72). On the basis of the Marks & Spencer decision, the term to be implied into the agreement, if it was to be implied, would be implied in the light of the express terms, commercial common sense, and the facts known to both the parties at the time the contract was made. The question which the court had to deal with in the Bou-Simon case was when the test should be applied.
In short, the Court found that Judge implied the term in order to reflect the merits of the situation as they appeared to him at the trial; that is, with the benefit of hindsight and knowing what actually happened. He did not approach the matter 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 held that it is not appropriate to apply hindsight and to seek to imply a term in a commercial contract just because it appears to be fair or because you consider that the parties would have agreed it if it had been suggested to them.
It is true that the agreement between Mr Bou-Simon and BGC contained no provision for repayment of the loan if Mr Bou-Simon did not serve the Initial Period and was not a partner but, as is well known, the parties are free under English law to make whatever bargain they wish as long as it is not illegal or void for public policy reasons and the Court should not imply a term into a contract merely because it considers that such a bargain is unfair. At the time the contract was made, for whatever reason the issue was not expressly addressed or, if the parties did think about it, they chose not to include it in the contract.
Having reviewed all of the express terms of the agreement and the surrounding circumstances at the time the agreement was executed and applying commercial common sense, the Court of Appeal reached the conclusion that the reasonable reader would not consider the implied term for which BGC contended either so obvious that it goes without saying or to be necessary for business efficacy in the sense that the agreement would lack commercial or practical coherence without it. The parties had chosen to make the bargain that they had and that bargain functioned perfectly adequately. It just didn't cater for what subsequently happened, a scenario all too familiar to those of us that deal with dispute resolution on a regular basis.
(This article originally appeared in a slightly different form in Building magazine)