The Court of Appeal concluded that parties can agree whatever they wish – even if it seems in hindsight not entirely fair
If there is one thing you can be sure of, it’s that courts will wrestle with issues of contractual interpretation on a regular basis. From time to time, such decisions signal a substantive development in the law (or a change of direction), while others refine the process or comment upon particular aspects of the overall approach courts take in this area. One recent case that looked at an issue related to contract interpretation was the decision of the Court of Appeal in Bou-Simon vs BGC Brokers, decided earlier this month.
It concerned the interpretation of an agreement made between Mr Bou-Simon and BGC Brokers. The question the court dealt with was whether a particular term should be implied in the agreement. 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 that Mr Bou-Simon would become a partner in the firm. 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.
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
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 that was unanticipated. 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 there was no express term (and this finding was not appealed) but did find that a term could be implied, and awarded the sum to be repaid to BGC. Mr Bou-Simon appealed.
There was no dispute about the test 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 vs BNP Paribas Securities Services Trust Co (Jersey) Ltd . On the basis of this decision, the term would be implied into the agreement in the light of the express terms, commercial common sense, and the facts known to both parties when the contract was made. The question the court had to deal with in the Bou-Simon case was when the test should be applied.
Parties are free to make whatever bargain they wish as long as it is not illegal or void for public policy reasons
In short, the first 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 subsequently 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 believe 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 parties are free 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 such a bargain unfair. At the time the contract was made, the issue was either not addressed or the parties chose not to include it.
The Court of Appeal reached the conclusion that the reasonable reader would not consider the implied term for which BGC contended so obvious that it went without saying or 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 they had and that bargain functioned perfectly adequately. It just did not cater for what subsequently happened – a scenario all too familiar to those of us that deal with dispute resolution on a regular basis.
Simon Lewis is a partner in the construction and engineering team at Womble Bond Dickinson