UK: Agreement Between Directors - Implied Terms And Conflict

Last Updated: 15 April 2013
Article by Victoria Brett

Facts:

Dear, Griffith (together D) and Jackson had co-founded a company (P) which had a wholly-owned subsidiary (T). J and D entered into an agreement which provided, at clause 5, that P would use its voting rights to nominate and appoint J as a director of T and procure his re-appointment at every AGM thereafter until one of five termination events occurred. Clause 7 provided that the parties would take such action as reasonably required to give effect to the agreement.

T's articles of association gave the voting shareholders the sole power of appointment of directors but article 88 also gave the directors power to remove a fellow director by written notice given by all the other directors.

J was re-appointed director at two successive AGMs, then his fellow directors (including D) served written notice on him under article 88.

J claimed specific performance of his right to be re-appointed under the agreement. D argued that a termination event had occurred or, alternatively, the agreement did not inhibit the other directors' right to remove him under article 88.

The judge at first instance held there was an implied term that J would not be removed as a director and, in view of clause 7, the parties were not to invoke article 88 and should take steps to amend or delete it. D appealed.

Held:

The appeal was allowed. McCombe LJ gave the leading judgment. He pointed to the fact that clause 5 was silent about whether or not D were disentitled from joining in a directors' notice under article 88, so the starting point was that nothing was to happen in that respect. The agreement was drafted by lawyers and negotiated between legally advised parties, so one could not readily assume that the express terms failed to represent the parties' true bargain. It would be a strong thing to import into the agreement a further protection covering the same ground but going beyond that which was expressed.

McCombe LJ continued that it was not necessary to imply a term requiring any party not to join in a proposed notice under article 88 for the commercial workability of the agreement, even if the commercial objective of one party was to achieve a different result. It was not obvious that the parties would have agreed the suggested implied terms; there were tenable reasons for differing views to be taken.

Counsel for J had argued that in the absence of the implied terms, clause 5 was rendered "futile". McCombe LJ did not agree with this. He said the clause had served its purpose by securing J's appointment as a director at three AGMs. Furthermore, the directors' power under article 88 was not exercisable by D on a whim; it required the concurrence of all the independent directors and had to be exercised in good faith in the interests of T. Clause 7 did not assist or take the matter further.

In conclusion, the implication of the terms proposed would involve an impermissible rewriting of the parties' agreement, and would subject them merely to one notion of what might have been the most sensible solution to the parties' conundrum. That was not a proper basis for implying terms into the agreement.

Comment:

The Court of Appeal did not need to consider the law on construction and implication of terms as the parties accepted the judge's summary of the current approach, but the decision here appears to follow the approach in Belize Telecom, that when an instrument does not expressly provide for what is to happen when some event occurs, the starting point is nothing. The Court of Appeal was also clearly persuaded by authorities which suggest consideration should be given as to whether the implied term is necessary to make the contract work.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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