No entitlement to interest on a loan agreement
In Al Jaber v Al Ibrahim, the claimant had loaned the defendants US$30m to fund an Arabic-language broadcasting service. The loan had been agreed orally and went unpaid, without any demand for payment for several years. When the claimant subsequently brought a claim for repayment of the loan, he also claimed an entitlement to interest, on the basis that a term should be implied into the oral agreement that the loan would bear interest “at a reasonable business rate.”
The issue was heard by the High Court as part of an application by the claimant for permission to serve the claim out of the jurisdiction on one of the claimants, which required that there be a “good arguable case”. The judge separated out the claim for repayment of the principal sum, for which he found there was a good arguable case, and the claim for interest, for which he found there was not a good arguable case.
“Untying the forensic Gordian knot”
On appeal, the Court of Appeal distinguished between the implication of an interest term as a matter of law (whether the making of a loan necessarily implied an obligation to pay interest), and the implication as a matter of fact, based on the terms of the contract and surrounding factors.
The judge found that, absent an express term, an interest provision would not be imposed as a matter of law. The judge did not accept that it was a matter of commercial common sense that a large loan would necessarily bear interest.
On the facts, the judge accepted the evidence that the claimant expected ‘some benefit’ out of the loan. However, he found that this benefit could have taken a number of possible forms, including being repaid “by way of equity in lieu of principal and interest“, which was something that the claimant admitted he would have been equally happy with. The claimant’s case was also undermined by the fact that in his letter of claim, he sought either a share of benefits obtained by the defendants or interest.
Given that there were other equally plausible alternatives to the term contended for, the judge did not consider that the imposition of a term would satisfy the test set out in Marks & Spencer v BNP Paribas – that the term was:
- necessary to give business effect to the agreement; or
- so obvious that it went without saying; or
- such that the agreement would lack commercial or practical consequences without the term.
In the event, this was not an issue that the court needed to rule definitively on, since it had already decided that the High Court judge had been wrong to separate out the principal and interest claims. In a pragmatic case management move, though, since the point had already been argued fully, the Court of Appeal took the “highly unusual course of untying the forensic Gordian knot and deciding this matter now.” As a result, the claim for interest was effectively struck out.
Terms not to be implied with the benefit of hindsight
In Bou-Simon v BGC Brokers, the defendant had joined the claimant firm of brokers as an employee with the intention of also becoming a partner. On joining the firm, the parties entered into an agreement by which the claimant loaned the defendant £336,000. The loan was to be repaid from the defendant’s partnership distributions and the agreement provided that if he ceased to be a partner after having served four years at the firm, any loan amount outstanding would be written off. In fact, the defendant did not end up becoming a partner. When he left within four years of joining the firm, the firm sought repayment of the loan.
In the High Court, the judge found in favour of the claimants, that a term should be implied into the agreement that the loan would repayable if the defendant left within four years. On appeal, however, the Court of Appeal found the reverse.
Start with the express terms
Giving the leading judgment, Asplin LJ found that the High Court judge had begun from the wrong starting point. Whether a term should be implied into the contract should not be looked at in light of what had actually happened (the claimant having not become a partner and having left within four years). The court should first construe the express terms of the agreement, and only then imply a term if that term is either so obvious that it goes without saying or if without that term the contract would lack commercial or practical coherence.
In this case, the implied term that was contended for was outside the scope of the contract as envisaged at the time of drafting, which was concerned with a loan to a partner and repayment from the partnership distributions. As such, the implied term would not be so obvious as to go without saying and the contract did not lack commercial or practical coherence without it.
Osborne Clarke comment
In each of these cases, the end result could be considered fairly harsh on the party lending money: in one case they were not entitled to any interest on a loan of US$30m and in the other case, they were not entitled to be repaid at all. These cases demonstrate emphatically that, post-Marks & Spencer, the test for implying a term into a contract will be applied strictly.
The message for contracting parties is clear. Don’t rely on the court to fill in the contractual gaps. You might think something is obvious, but as Lord Neuberger put it in Marks & Spencer “a term which is not necessary to give business efficacy to a contract is unlikely to be so obvious it goes without saying“. In other words, if the contract is capable of functioning sensibly without the term being argued for, a court is unlikely to imply that term into the contract. This will be the case no matter the unfairness of the end result.