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To Belize, or not to Belize, that is the question: have the traditional tests for...
Macfarlanes LLP currently authors the Litigation & Dispute Resolution section of The In-House Lawyer magazine. For more information and articles from this author click here.
implying terms into contracts been superseded?
In the recent case of Jackson v Dear & anor , Briggs J considered, among other things, the extent to which traditional tests for implying terms into contracts have been superseded by Lord Hoffmann's decision in the Privy Council case of (1) Attorney General of Belize (2) ECOM Ltd (3) Belize Telecommunications Ltd v (1) Belize Telecom Ltd (2) Innovative Communication Co LLC . This article focuses on that element of Briggs J's judgment. It also considers the case of SNCB Holding v UBS AG , in which Cooke J also considered the impact of Lord Hoffmann's dicta in the Belize case and made some interesting comments about pleading implied terms.
Implied terms - the traditional approach and Belize
Historically, the courts have applied a variety of tests to the question of whether a term can be implied into a contract. These included the ‘business efficacy' test and, perhaps most famously, the statement by Mackinnon LJ in Shirlaw v Southern Foundries (1926) Ltd , that a term can be implied into a contract where it is: ‘... something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common "Oh, of course!"'
In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977), Lord Simon of Glaisdale identified the following tests for the implication of a term:
‘1) it must be reasonable and equitable; 2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; 3) it must be so obvious that "it goes without saying"; 4) it must be capable of clear expression; 5) it must not contradict any express term of the contract.'
However, in the Belize case, Lord Hoffmann advocated a more general approach. He outlined the various different approaches taken by the courts in earlier cases and said that they were: ‘... best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means...' (emphasis added).
According to Lord Hoffmann's formulation, therefore, the implication of a term is ‘an exercise in the construction of the instrument.' He went on to say that: ‘... in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.'
Jackson v Dear
The dispute in Jackson v Dear concerned the meaning and effect of a written agreement (the agreement) between the claimant, Mr Jackson, and the defendants, Mr Dear, Mr Griffith and various corporate entities, including their wholly owned company Polygon Credit Holdings II Ltd (PCH II).
The agreement related to the constitution of the board of directors of Tetragon Financial Group Ltd (TFG) in which PCH II held all of the voting shares. In particular, the agreement provided for the voting shares of PCH II to be used to nominate and appoint Mr Jackson as a director of TFG at the next AGM and to reappoint him at every AGM thereafter unless and until one of five ‘termination events' occurred.
The Articles of Association of TFG gave the voting shareholders the sole power of appointing directors (as well as an unfettered power to remove them). Article 88 set out a number of other situations in which directors could be removed. For the purposes of this case, the key provision was Article 88(e), which provided that a director could be removed by all the other directors giving notice to vacate office.
Mr Jackson was appointed as a director in 2008 and reappointed in 2009 and 2010. However before the 2011 AGM, his fellow directors (including Mr Dear and Mr Griffith) exercised their powers under Article 88(e) to remove Mr Jackson, following a falling out as to the management of the funds controlled by TFG. Notwithstanding the terms of the agreement, the defendants subsequently refused to procure that Mr Jackson be reappointed at the AGM in 2011. They argued that it would be ‘futile' for Mr Jackson to insist upon his reappointment because his fellow directors would immediately exercise their power under Article 88(e) to remove him again.
The court, therefore, had to consider the relationship between the agreement and the Articles. The defendants argued that the agreement contained nothing to inhibit the directors' power under Article 88(e) to remove Mr Jackson if he were reappointed. This power in the Articles was an important safeguard for the administration of the affairs of the company by its board and the parties did not make provision for its removal or suspension in the agreement. The parties should therefore be taken to have concurred in its continuing effect.
Mr Jackson argued that it was an implied term of the agreement that the defendants and PCH II would procure that he would not be removed as a director of TFG between AGMs for as long as Mr Jackson wished to be a director of TFG and no termination event occurred. Mr Jackson also argued that the unrestrained exercise of the power under Article 88(e) rendered the primary obligation of the agreement, to re-appoint Mr Jackson, futile and the parties should not be taken to have undertaken a futile contractual obligation.
The current test for implied terms
At paragraph 11 of his judgment, Briggs J said that: ‘... the point at issue in the present case appears to be the extent to which the traditional processes and rules about the implication of terms have been subsumed (if they were not always subsumed) into the more general task of ascertaining what the relevant agreement means'. In other words, does Lord Hoffmann's test in the Belize case (which, as a Privy Council decision, is of persuasive rather than binding authority) represent the current position under English law?
The defendants argued that the Court of Appeal had, in subsequent decisions, rowed back from the Belize case or declined fully to accept it into English law. The defendants relied in particular on the case of Mediterranean Salvage & Towage v Seamar Trading & Commerce Inc  in which Lord Clarke affirmed the continuing vitality of the necessity test in relation to implied terms (at paragraph 15) and approved (at paragraph 17) of the well-known observation of Sir Thomas Bingham in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd  that, by comparison with interpretation of express language:
‘... the implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is potentially so intrusive that the law imposes strict constraints on the exercise of this extraordinary power'.
However, Briggs J rejected this argument. He noted that, at paragraph 8 of his judgment, Lord Clarke had predicted that Lord Hoffmann's analysis in the Belize case would be referred to as often as his famous dicta on the interpretation of express terms in Investors Compensation Scheme Ltd v West Bromwich Building Society . Furthermore, while Lord Clarke had said that the business efficacy test was ‘an entirely appropriate question to ask', this was only in the context of the facts of the case before him (which were similar to those of The Moorcock (1888) itself, in which the business efficacy test was originally laid down) and Lord Clarke was not suggesting that this test should be applied in every case.
Briggs J also provided a useful summary of the relevant principles, which is worth quoting in full:
- ‘The implication of terms is no less a part of the process of ascertaining the meaning of an agreement than interpretation of express terms. Implication addresses events for which the express language of the agreement makes no provision.
- In such a case the usual starting point is that the absence of an express term means that nothing has been agreed to happen in relation to that event. But implied terms may be necessary to spell out what the agreement means, where the only meaning consistent with the other provisions of the document, read against the relevant background, is that something is to happen.
- Although necessity continues (save perhaps in relation to terms implied by law) to be a condition for the implication of terms, necessity to give business efficacy is not the only relevant type of necessity. The express terms of an agreement may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. In such a case an implied term is necessary to spell out what the contract actually means.'
Decision in Jackson v Dear
Having found in favour of the claimant as to the proper test for the implication of terms, the judge also agreed that a term should be implied into the agreement that Mr Jackson would not be removed as a director of TFG between AGMs for as long as he wished to remain a director and no termination event occurred. His reasoning was largely specific to the facts of the case and therefore of less general interest than his comments about the proper test for implying terms into contracts. In broad terms, however, he accepted the claimant's submission that the ‘plain intent and effect' of the agreement was that Mr Jackson should remain a director of TFG unless and until a termination event occurred. Any interpretation that enabled Mr Jackson to be removed, and which then rendered his reappointment futile, would undermine the main express obligations of Mr Jackson's counterparties under the agreement so that an appropriately tailored implied term needed to be identified to avoid that unintended result. The judge also found that the same result could be reached by applying the established principle that a party must do nothing of its own motion to render an agreement inoperative.
SNCB v UBS AG
Another recent decision in the High Court, SNCB Holding v UBS AG, provides helpful guidance on how a party should present its arguments that a term ought to be implied into an agreement. In that decision, Cooke J also examined the law on implied terms and held that the approach to be adopted is the one set out in the Belize case - albeit with the ‘gloss', applied by Lord Clarke MR in the Court of Appeal in the Mediterranean Salvage & Towage v Seamar Trading & Commerce Inc  case, that it
must be necessary to imply the proposed term. He emphasised that it is clear from the authorities that the court has no power to improve upon the instrument that it is called upon to construe and it cannot introduce terms to make it more fair or reasonable.
In construing a number of financial instruments, Cooke J highlighted a number of issues that are relevant to parties that seek to claim that a term should be implied into a contract. Firstly, evidence of the subjective understanding of a party will not be admissible either in the construction of an agreement or in relation to the implication of terms into the agreement. Secondly, parties need to be careful when pleading an implied term - in this case, it was clear that the implied term pleaded would not work without another term being implied and SNCB initially failed to plead the second implied term. SNCB also asserted several alternative and inconsistent variations of its proposed implied term which, in the judge's view, was inconsistent with the idea that an implied term must be the: ‘... only term which, read against the other terms of the [relevant agreement] and its background constitutes the one and only answer consistent with the rest of the [relevant agreement].'
Both Briggs J and Cooke J were clear that, as a result of Lord Hoffmann's judgment in the Belize case, the processes of interpretation and implication of terms have become ‘assimilated'. The question in both cases is, in broad terms: what would the contract, read against the relevant background, reasonably be understood to mean? It remains the case that the proposed implied term must be ‘necessary' but, at least in the view of Briggs J, this is a broader concept than the old ‘business efficacy' test and an implied term will be ‘necessary' if it is required to spell out what the contract actually means. This is a reflection of the fact that the court will not imply a term simply because it would be fair or reasonable to do so.
By Geoff Steward, partner, and, Emma Jacob, solicitor, litigation and dispute resolution department, Macfarlanes LLP.
E-mail: firstname.lastname@example.org; email@example.com.
(1) Attorney General of Belize (2) ECOM Ltd (3) Belize Telecommunications Ltd v (1) Belize Telecom Ltd (2) Innovative Communication Co LLC  UKPC 11
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896
Jackson v Dear & anor  EWHC 2060 (Ch)
Mediterranean Salvage & Towage v Seamar Trading & Commerce Inc  1 CLC 909
Philips Electronique Grand Public SA v British Sky Broadcasting Ltd  EMLR 472
SNCB Holding v UBS AG  EWHC 2044 (Comm)
Shirlaw v Southern Foundries (1926) Ltd  2 KB 206
The Moorcock (1888) LR 13 PD 157
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