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A lack of interest in commercial contracts

22 Aug 2018

 

In the recent case of Al Jaber v Al Ibrahim & another (2018), the Court of Appeal held that a clause allowing interest to be claimed should not be implied into a loan agreement.

 

In December 2001, Al Jaber and Al Ibrahim reached oral agreement that Al Jaber would loan US$30 million to Al Ibrahim, which Al Jaber subsequently did. The parties did not discuss interest payments.

 

In 2015, Al Jaber sued Al Ibrahim for repayment of the loan plus interest of around US$32 million.

 

At an interim hearing the judge determined that the claim for interest was not a good arguable case, therefore could not proceed.

 

Al Jaber appealed the decision that the interest claim was not strong enough to proceed.

 

The Court of Appeal ultimately agreed that the claim for interest was not strong enough to proceed on the basis that the evidence before it was insufficient to support Al Jaber’s case that he should be entitled to interest payments on the loan.

 

Al Jaber argued that it was a matter of commercial common sense that a loan of such substance would bear interest. However, the Court of Appeal stated that, while Al Jaber’s case in respect of the interest had gradually become more apparent throughout correspondence, Al Jaber had stated that he had expected “some benefit” from providing the loan but that it did not necessarily have to be interest payments and that he would have been “equally content” with a shareholding in Al Ibrahim’s company.

 

In the case of Marks & Spencer plc v BNP Paribas Securities Services Co (Jersey) Ltd (2016) the court said that in order for a term to be implied into a contract it must be necessary to give business efficacy to the contract or must be so obvious that “it goes without saying”.

 

The Court of Appeal therefore dismissed the claim for interest after determining that it was not necessary to give business efficacy to the contract and was not so obvious that it goes without saying.

 

This interim hearing was actually about whether Al Jaber could serve the claim on Al Ibrahim. However that is not relevant for the purposes of this article. Ultimately, first, the High Court and then the Court of Appeal both reached the decision that there was no implied term as to interest in the contract between Al Jaber and Al Abrahim. This is because:

 

  • the parties had not discussed interest payments before the loan was made therefore there was no express term of the contract; and

  • there was not enough evidence to support Al Jaber’s contention that a term that interest would be payable on its loan to Al Ibrahim could be implied into the contract.

 

This decision shows that the courts set quite a high bar when implying terms into contracts.

 

Where a loan is made there would be an expectation that interest is payable otherwise what is the benefit to the lender? However, the approach of the court is that, unless a term needs to be implied so that the contract is practical or is otherwise so obvious that it goes without saying, then it will not be implied. As such, Al Jaber could not claim interest which would have amounted to around the size of the loan itself.

 

The best way to loan monies is for there to be a written loan agreement as this brings certainty to the contract. However, if the parties are relying on an oral agreement then they need to take steps to ensure that all terms, even those which they assume would be standard, are discussed and agreed upon.

 

If you have any queries regarding drafting agreements or challenging a breach of contract, please do not hesitate to contact with Alexandra Withers or Chris Morgan on 0191 232 0283 or at ajw@srflegal.co.uk and chris.morgan@srflegal.co.uk respectively.

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