Contracts – express terms matter!

Posted: 20th July 2018

ContractThe law requires that commercial contracts are interpreted on the basis of the words actually used.

It is illegitimate to apply hindsight in order to achieve what might be viewed as a fair outcome.

In an important decision in an employment case, the Court of Appeal found that a judge fell into precisely that trap.

A senior financial broker who had joined a new employer on the basis that he would shortly become a partner. Under the terms of a contract, the employer paid him a lump sum of £336,000 less than a month after he started his new job.

The payment was made notwithstanding the fact that he had yet to be confirmed as a partner. In the event, he did not become a partner prior to his resignation about 16 months after he joined the firm.

In upholding the employer’s claim to recover that sum, a judge later accepted that the money was a loan and implied a term into the agreement to the effect that it was repayable in full, with interest, if the broker left his post less than four years after his employment commenced.

The judge found that, in the absence of such an implied term, the agreement would lack commercial and practical coherence and the outcome would be demonstrably unfair to the employer, in that the broker would be able to simply pocket the money and leave as soon as he pleased.

In allowing the broker’s appeal against that ruling, the Court found that the judge had succumbed to the temptation of implying a contractual term that, with the benefit of hindsight, in his view reflected the merits of the situation. He had been wrong to imply a term merely because it was apparently fair to do so or because, to his mind, the parties would probably have agreed to it had it been suggested to them.

The judge had construed the agreement in order to fit the implied term, rather than focusing on its express terms as he should have done. An informed reader of those express provisions would not consider that an implied term was either obvious or necessary to achieve business efficacy. There was thus no contractual obligation on the broker to repay the money.