A company's articles of association ("articles")
are essentially a contract between a company and its members. The
recent Court of Appeal case of Cream Holdings Ltd v
Davenport shows that, in certain circumstances, the court is
willing to imply terms into this contract where it deems
necessary.
The Facts
On leaving the company, a director was required, in terms of the
articles, to transfer his shares at a value determined by a third
party accountant. The company sought to appoint a third party
accountant, however, the director alleged that there was an absence
of full financial disclosure by the company and refused to sign the
accountant's letter of engagement. The company then sought a
court declarator to confirm the engagement terms so as to progress
matters.
The Decision
The court implied a term into the company's articles of
association that the transferor of shares (i.e. the director) would
co-operate with the appointment of an accountant for share
valuation, and not unreasonably refuse to agree to terms of the
accountant's engagement, if reasonable.
In arriving at its decision, the court considered whether the
company owed any obligation to the director in providing full
financial disclosure prior to agreement on the terms of engagement.
As there was no such express obligation in the articles, it was
held that this was not the case. Taking into consideration the
principle that "a contract should better function than
perish", the court concluded that the inclusion of the terms
were "necessary to imply, and do represent the minimum
machinery necessary to make these articles work".
Comment
This decision serves as a reminder that the courts are willing
to imply terms into contracts and that articles will be considered
like any other contract, in terms of their commercial purpose.
Contracting parties should be aware that the express terms as set
out in contract may not amount to an exhaustive statement of the
relevant principles - terms may be applied to determine
contentious issues. As always, clear and careful expression of the
intentions of all parties concerned can help to ensure that
contractual provisions can be enforced without the need for
expensive court proceedings.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
