No implied term unless all reasonable people agree
DEAR v JACKSON (CA) [2013]
The Court of Appeal (CA) overturned the decision of the High Court (HC) and looked at the different approaches that have previously been taken in relation to the test for implying terms into a contract. The CA seemed to take a more restrictive approach to the implication of terms.
Facts:
- J and D entered into an agreement under which J was to be appointed and retained as a director of a company at each AGM unless certain ‘Termination Events’ occurred.
- The contract also contained a ‘further assurance’ clause which required each party to take such actions as were necessary to give effect to the agreement, including J’s appointment and retention as a director.
- J was dismissed as a director at an AGM by a notice given in accordance with the company’s articles of association, which required such notice to be given by two or more other directors. No Termination Event had taken place.
- The CA had to decide:
- whether it was an implied term that J would not be removed as a director except where there was a Termination Event; and
- whether the further assurance provision obliged the other directors not to remove J using the articles of association and to amend the right of removal under the articles of association to protect J’s position provided no Termination Event had occurred.
- The Courts have historically applied a number of different tests to determine when a Court can imply a term into a contract. There has not always been consistency across these tests. Essentially there have been two main strands:
- where the term is necessary to give ‘business efficacy’ to the contract; a term is necessary to make the contract work. This is the traditional formulation; and
- where the term is necessary to reflect the intention of the parties despite that intention not being set out expressly in the contract; to give effect to what the contract would reasonably be understood to mean.
- The HC found in favour of J and implied a term to the effect that D was contractually obliged to not take any steps to remove him unless and until a Termination Event occurred. Also, the further assurance clause required D not to invoke the applicable article or any other power to remove J as a director without the happening of a Termination Event.
- The Court stated that in relation to implied terms generally:
- “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;
- 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 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.”
- D appealed.
Decision:
- The CA overturned the HC decision, saying it would not imply a restriction that D could not act to remove J under powers granted under the articles of association to the directors.
- One judge said given the starting point, namely the silence of the contract itself, one has to ask whether the consequences would contradict what a reasonable person would understand the contract to mean. We would query whether the contract was actually silent on this point.
- The opinions of reasonable people may well differ in any given set of circumstances. The question should be: would the consequences contradict what ‘any’ (rather than ‘a’) reasonable person would understand the contract to mean? Where opinions as to ‘commercial common sense’ in any given situation may differ between reasonable people, there is no room to imply a term.
- The judge had substantial doubts whether all reasonable people would agree that ‘commercial common sense’ must dictate a choice of J's proposed implied terms over the express words of the agreement and that a ‘sensible bargain’ could be made either way. Therefore, it did not agree that the requested term should be implied.
Points to Note:
- On the facts it is perhaps debatable whether the CA got this decision right. However, what is more important is what the CA said about the need for all reasonable people to agree for a term to be implied. This seems to be more restrictive than the previous test which simply looked at a single, hypothetical reasonable person.
- The CA reiterated that its function is to ascertain the meaning of the agreement rather than to seek to improve upon it. In this case, the implication of the term proposed would, according to the judges, have involved an “impermissible re-writing of the parties' contract” which is not a proper basis for implying terms into a contract.
- The contract was drafted by lawyers, negotiated between legally advised parties and it was drawn up after litigation had been about to start. As a result it could not be assumed that the express terms of the contract failed to represent the parties' true agreement. The agreement was silent on the right of removal under the articles but it ”would be a strong thing to import into the agreement a further protection covering the same ground but going beyond that which is expressed".
- This emphasised once again that contracting parties should always strive to have clear and concise drafting which is as comprehensive as possible to avoid a dispute arising in the first place.