The implication of terms into contracts
ATTORNEY GENERAL v BELIZE TELECOM (PC) [2009]
Issues:
This case reformulated previous tests utilised to decide whether to imply a contractual term into a written contract, into a single, objective, question: “would the proposed implied term spell out what the contract actually means?” The Court emphasised that Judges do not have the power to ‘improve’ a written contract or to make it fairer or more reasonable. In implying a term the Court should not thereby be changing the meaning of the contract.
The Privy Council (PC) was asked to consider whether a term should be implied into the articles of association of Belize Telecom whereby directors appointed by a special shareholder would automatically lose office when that special share was redeemed or the right to appoint no longer existed. It was held that a term requiring the directors to vacate office should be implied to the effect that that when the special share went, the appointed directors went with it.
Decision:
- The articles of association were regarded as a form of quasi contract. Previous cases on the subject were referred to but the PC came to the conclusion these tests were simply “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”.
- The Court is only concerned with finding the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed. The actual intention of any party or, indeed, all parties is not relevant. It is clear that, so far as the PC is concerned, how the parties to the contract would react to a proposed implied term is irrelevant. It is also not necessary that the need for the implied term should be obvious or immediately apparent to either or both of the parties.
Points to note:
- Although this decision is only persuasive and not strictly binding on English Courts, the judgment is important. It illustrates the difficulties a party must overcome if it is to successfully argue for a term to be implied. The usual inference will, according to the PC, be that if a contract does not expressly provide for a particular situation, that was intentional; the express terms should continue to operate undisturbed. If the situation in question causes loss to one or other of the parties, the loss lies where it falls. Care must therefore be taken to try to anticipate different events or circumstances and deal with them expressly.
- The approach of the PC in this case raises a number of interesting questions. They clearly see the implication of terms as being simply an integral part of the construction/interpretation of a contract not something separate.
- It also remains to be seen where this leaves the traditional tests of ‘terms necessary to give a contract business efficacy’ or ‘terms which are so obvious that they go without saying’. The Judge did not directly say these tests were now inappropriate. Rather, he simply said that they were different ways of expressing the same test as set down by the PC. However, the judge did say that “there are dangers in treating these alternative formulations… as if they had a life of their own.” We would agree with that in the sense that it seems to us that by applying a ‘business efficacy’ test you could easily get a very different answer to the question as to whether and, if so, what term should be implied.