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Implied terms, deleted words and Entire Agreement clauses

16.10.2018 Energy & infrastructure

Martin Sandgren

Martin Sandgren Partner

Leila Peggs

Leila Peggs Managing Associate

In our February 2018 Bulletin, we reported on three recent cases which applied the test for the implication of terms set out in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72. Since then, the Court of Appeal has given judgment in another two cases - Bou-Simon v BGC Brokers LP [2018] EWCA Civ 1525 and JN Hipwell & Son v Szurek [2018] EWCA Civ 674 – providing further guidance on the process trial judges should adopt on the implication of terms. In Bou-Simon, the Court of Appeal also had cause to consider when and what, if any, use can be made of words deleted or omitted in earlier versions of an agreement in the implication process while in JN Hipwell & Son, the interaction between Entire Agreement clauses and the implication of terms was considered.

Implication of terms and deleted words

Bou-Simon v BGC Brokers LP concerned whether a payment of £336,000 to the Appellant, a former partner of the Respondent broking firm, under a Loan Agreement was due to be repaid. The Appellant commenced his second period of employment with the Respondent in February 2012. It was intended that the Appellant become a partner and he entered into a separate employment contract. The Loan Agreement contemplated the Appellant becoming a partner and repaying the loan from partnership distributions. It stated that if the Appellant ceased to be a partner, the loan amount would only be written off if he had served an initial period of four years.

The Appellant did not become a partner and left the Respondent within the initial four year period. The Respondent claimed repayment of the loan amount. There was no express provision in the Loan Agreement to this effect though an earlier draft contained wording which contemplated repayment from sources other than partnership distributions. The Appellant contended that the loan amount was a sign-on gift or “golden hello” though this was rejected by the trial judge who found that it was necessary to give business efficacy to the Loan Agreement to imply a term in respect of repayment.

Asplin LJ (Singh and Hickinbottom LLJ agreeing) noted the trial judge had “succumbed to the temptation” to imply a term which reflected the merits of the situation rather than approaching the matter from the perspective of a reasonable person reading the Loan Agreement knowing all the surrounding circumstances at the time it was made.

The Loan Agreement was stated to be “about a loan to be made to a partner.” The Respondent’s characterisation of the Loan Agreement as “golden handcuffs” to keep the Appellant working at the Respondent for four years, whether as a partner or an employee, was rejected because if such a term was implied, it would be necessary to rewrite the Loan Agreement so that it required repayment whether the Appellant was an employee or a partner. This was also consistent with the fact the parties had deleted similar provisions from an earlier draft which added further weight to the conclusion that it was not necessary for business efficacy to imply the term into the Loan Agreement.

Asplin LJ and Singh LJ also chose to make a number of observations on the deleted provisions in the earlier drafts. Asplin LJ considered several cases involving the modification of non-final drafting and noted that:

(i)  deleted provisions are only relevant to construction where express terms are ambiguous; and

(ii)  there are different processes for the construction of contracts and the implication of terms. Therefore, even if there was evidence that the deleted clauses had deliberately been omitted, it would only be possible to take them into account in the implication process if they were part of the “surrounding circumstances and not merely part of the course of negotiations.”

Singh LJ also noted the potential “wider importance” of the admissibility of deletions from previous drafts of a concluded contract. He was open to the suggestion that deletions may be admitted to negate the implication of words in the same form even though they could not be used as an aid to construction. Singh LJ also distinguished between the threshold requirements of interpretation and implication for the admission of deleted words: he did not consider it was necessary that there be ambiguity in the contract before such words could be admissible though, ultimately, he left this open to an appropriate future case.

As most contract drafters work in versions of documents and keep earlier iterations intact, it would seem a rich seam to mine in exercises of both contract interpretation and implication of terms. Asplin and Singh LLJ’s comments provide a launching pad for an appropriate case to provide definitive guidance on these matters.

Entire Agreement clauses and implication of terms

In this Bulletin, we also report on the Court of Appeal’s decision in NF Football Investments Limited and another v NFCC Group Holdings Limited and another  where an Entire Agreement clause was held to effectively exclude a statutory misrepresentation claim even though it made no express reference to such a claim.

The interaction between Entire Agreement clauses and implied terms was considered by the Court of Appeal in JN Hipwell & Son v Szurek. The Appellant was the landlord of premises leased by the Respondent for her café business. The lease contained both an Entire Agreement clause and a non-reliance clause under which the Respondent lessee acknowledged that she was not relying on any statement or representation made by the Appellant. The Respondent claimed that a term was implied into the lease as to the safety of the electrical installation on the premises.

Hildyard J (with whom Gross LJ agreed) confirmed the trial judge’s finding that in order to ensure the lease had “commercial or practical coherence”, a covenant on the part of the Appellant lessor should be implied as to the continuing safe installation of electrical and other service media on the premises. The existence of the Entire Agreement clause had “no application” to the process of implication.

This decision gives contracting parties further guidance on the approach a court will adopt to the implication of terms – the presence of an Entire Agreement clause is no barrier if a contract lacks business efficacy. It is also a reminder of the importance of clear and careful drafting as boilerplate provisions like Entire Agreement clauses will not always provide a safe harbour.

Article authors:

Martin Sandgren Leila Peggs