Implied Terms

“Business Efficacy”, “Officious bystander” and now the “Necessity” Test to consider the proper test for Implied Terms

In the recent case of Jackson v Dear and another [2012] EWHC 2060 (Ch) the High Court asked the question “is the implied term necessary to make the contract work?”

What is meant by Implied Term?  Terms which have not been expressly agreed by the parties to a contract may be implied by the courts in certain circumstances, including:

–       Where custom or usage of such a term can be shown to be “invariable, certain and general” or “notorious, certain and reasonable”

–       Where the court considers it necessary to do so to give business efficacy to the contract and/or where the term represents the obvious, but unexpressed, intention of the parties.

The Privy Council, in the case of Attorney General of Belize and others v Belize Telecom Ltd and another [2009] UKPC 11 (Belize), expressed the view that the proper test for deciding whether or not a term should be implied into a contract was whether it would spell out, in express words, what the contract, read against the relevant background, would reasonably be understood to mean.  Previous tests used by the courts such as the business efficacy or officious bystander test were no more than reformulations of that question and therefore should not be treated as being different or additional tests.

In the Jackson case, the Claimant, Mr Jackson, entered into an agreement with the Defendants (Dear and another) on 29 September 2008.  The agreement provided for the appointment of Mr Jackson as a director of Tetragon Financial Group Limited (TFG), (a wholly owned subsidiary company of one of the Defendant companies), at the next AGM and his reappointment at each subsequent AGM unless specific events occurred.  Those specific events were set out in the agreement and defined as “Termination Events”.

The agreement also contained a further assurance clause, which required the parties to “take such other actions as may be reasonably required to authorise, and approve and otherwise give effect to this Agreement.”  A further assurance clause seeks to cover any omissions in the agreement, which may not be noticed when it is signed and which, if unremedied, would change the way the agreement was intended to work.  It can also deal with a situation where completion of the entire transaction does not take place when the main agreement is signed.

Prior to the 2011 AGM the Defendants dismissed Mr Jackson by notice under article 88(e) of TFG’s Articles of Association.  Article 88(e) permitted the removal of a TFG director by notice given by two or more of the other directors of TFG.  At the 2011 AGM the directors declined to re-appoint Mr Jackson.  They wrote to him explaining that they would invoke article 88(e) to remove him if he was re-appointed, so any insistence on his part to be re-appointed would be futile.

The High Court was therefore asked to decide:

  • Whether it was an implied term of the agreement that Mr Jackson would not be removed (and the Defendants would procure that Mr Jackson would not be removed) as a director of TFG between AGMs for as long as he wished to be a director and no Termination Event had occurred; and
  • Did the further assurance clause in the agreement require the Defendants, so long as no Termination Event had occurred, to not invoke article 88(e) of TFG’s Articles of Association to remove Mr Jackson as a director; and
  • To disapply, amend or delete the power of removal in article 88(e) so as to remove their power to invoke it against Mr Jackson.

The Judge subsequently decided in favour of Mr Jackson finding that the Defendants were contractually obliged, having appointed Mr Jackson as a Director of TFG in 2008, to not take any steps to remove him unless and until a Termination Event occurred.  It was also held that the further assurance clause within the agreement required the Defendants not to invoke article 88(e) or any other power to remove Mr Jackson as a director of TFG without the happening of a Termination Event.

The Judge in reaching his decision also considered that the express terms of any agreement may work perfectly well so that the parties are able to perform their express obligations, but that this may lead to consequences where a reasonable person would not have understood the contract to mean.  In such circumstances, an implied term would be required to spell out what the contract actually meant.

The Judge concluded that the necessity to give business efficacy is not the only relevant type of necessity.  He dismissed the Defendant’s submission that the further assurance clause was a “typical piece of unthinking boilerplate which added nothing to the meaning of the agreement” and, in fact, held that this clause actually required the Defendants to take further steps to give effect to the agreement.

This case highlights how the courts will look at various tests to assist them in interpreting clauses within contracts so as to achieve a desired result.