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The risks of an implied term in a loan agreement

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An implied term is one that shows the unwritten intention of the parties at the time of entering into the contract and should not conflict with any express term. A recent case[1] has considered a dispute about implied terms under loan documentation.

Selling the loan book

A bank made facilities available to a developer. The bank was entitled to assign its interest in these facilities and, when it later went into special liquidation, it started to sell its loan book.  The portfolio of loans that the bank marketed contained the developer’s facilities together with some distressed loans. The developer was concerned that this gave prospective buyers of the developer’s new properties the misconception that the developer’s loan was also in trouble.

The developer claimed that this prevented potential buyers from purchasing the properties as they would instead buy the loan to obtain the properties by enforcement of security. Alternatively the developer worried that potential buyers would try to buy the properties at a discount from whoever did buy the loan.  The developer claimed breach of contract by the bank based on an alleged implied term of the loan documentation that the bank would not do anything to hinder the price or marketing of the properties by marketing the sale of the loans in competition with the sale of the properties.

The bank wanted the claim to be struck out of court, arguing that the agreement expressly permitted it to market the loans for sale and to provide information about the developer group to any potential buyer. To include the suggested implied term would be inconsistent with this express provision of the agreement.

Developer 1: Lender 0

Initially the developer was successful. The court looked at a provision that referred to fees payable on sale of the property and thought it could be viewed as a profit sharing arrangement. It was therefore arguably not surprising that there could be an implied term that the bank would not do anything to prevent the maximum profit from the properties being realised.  The judge felt that the matter should therefore continue to full trial.

Inconsistency tests

In the end, however, the bank eventually won with the Court of Appeal finding in its favour, reminding us that two of the key points for whether or not a contract contains an implied term are:

  1. whether or not the implied term must be a requirement for “business efficacy” of the contract and that the parties to the contract would both definitely mean for the term to be included if asked when entering the contract; and
  2. that the implied term must not contradict any of the expressed terms.

There was nothing to suggest the parties had entered into a joint profit-sharing venture.

The Court considered whether or not the term was “linguistically” or “substantively” inconsistent with the rest of the agreement between the parties.  The implied term was not “linguistically inconsistent” with the expressed terms in the contract.  There could be a number of reasons that the loan could be marketed that wouldn’t impact on the marketing of the properties so there would not necessarily be reason to imply a “no marketing” term.   However, the court did feel that implying such a term into the contract would be “substantively inconsistent” with other provisions in the contract allowing for the transfer of the loan and the disclosure of information about it to prospective purchasers.

The case is another reminder to take care to ensure, so far as you are able, that contract clauses are not inconsistent with each other and if there is anything you wish to rely on you should expressly state so in the contract in a way that is consistent with each and all of the provisions.

[1] Irish Bank Resolution Corp Ltd (In Special Liquidation) v Camden Market Holdings Corp [2017] EWCA Civ 7

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