UK: AG Of Belize V Belize Telecom Applied: The New Test For Implied Terms

Last Updated: 29 October 2009
Article by Jeremy Mash

Mediterranean Salvage and Towage Ltd v Seamar Trading and Commerce Inc: The Reborn [2009] EWCA Civ 531

Two recent decisions, one delivered by the Privy Council1 and the other by the Court of Appeal2, have re-examined the circumstances in which the courts will find implied terms in contracts. Following the reformulation of the test by Lord Hoffmann in the Privy Council, the Court of Appeal has now applied it to an English decision.

In the Privy Council decision delivered earlier this year, Lord Hoffmann, after making some general observations in respect of the approach of the courts, stated that a court faced with a proposed implied term simply needs to ask one question:
"Is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?" Lord Hoffmann highlighted that "the implication of the term is not an addition to the instrument. It only spells out what the instrument means".

The decision concerned the construction of the articles of association of a company incorporated to take over the undertaking of the Belize Telecommunications Authority, a public body which had been the monopoly provider of telecommunication services in Belize. The articles provided that any person who held both a "golden share" plus 37.5% or more of the issued ordinary shares in the company could appoint or remove two directors. The articles were silent as to what was to happen to the two directors if, as happened in this case, the golden shareholder no longer held the requisite percentage of ordinary shares.

Belize Telecom Ltd ("BTL"), which had been the golden shareholder, argued that the two directors were irremovable unless they resigned, died or vacated office under article 112 of the articles of association, which provided for vacation in circumstances of conflict of interest, bankruptcy or other specified reasons. The Attorney General of Belize (the "AG") argued that the articles should be construed as providing by implication that a director who had been appointed by a person holding the requisite percentage of ordinary shares vacated his office if his appointer ceased to hold such a shareholding.

The Court of Appeal of Belize held against the AG. However, Lord Hoffmann, who delivered the advice of the Privy Council, decided the appeal should be allowed.

Lord Hoffmann recited the established principle of construction that, in discovering what an instrument means, it may be that the meaning is not necessarily or always what the authors or parties to the document would have intended. "It is 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", as established in his own famous judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. The implication of terms is an aspect of that exercise, providing terms for specific situations which have not been addressed by the parties in drafting.

In this context, Lord Hoffmann referred to other formulations of the relevant test for the implication of terms or conditions which previous authorities had laid down, such as that the implied term must "go without saying" or that it must be "necessary to give business efficacy to the contract" or that it must be capable of clear expression and not contradict any express term of the contract. However, he concluded that those other tests or conditions were not to be treated as different or additional to the single question stated above. Rather, they were "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"

Applying the central question to the facts of the Belize case, Lord Hoffmann found that the articles could not reasonably have been meant to allow the directors to remain in office after the requisite shareholding had gone, as the directors were only there in the first place by virtue of that shareholding. This was necessary to avoid defeating what appeared to have been the overriding purpose of the machinery of appointment and removal of directors.

Some three months later, Lord Hoffmann's formulation was applied in the Mediterranean Salvage decision delivered by the Court of Appeal. Rix U referred to Lord Hoffmann's "new formulation of the implied term test" and Lord Clarke MR, delivering the leading judgment, went as far as to predict that Lord Hoffmann's analysis would soon be as much referred to as his approach to the construction of contracts in Investors Compensation Scheme v West Bromwich Building Society. However, the Court of Appeal emphasised that the requirement of necessity remained. Lord Clarke MR considered that Lord Hoffmann was "not in any way resiing from the often stated proposition that it must be necessary to imply the proposed term. It is never sufficient that it should be reasonable". The central question for the implication of a term is therefore "Is it necessary to make the contract work?"

The Mediterranean Salvage decision arose out of a dispute between the owners of a vessel and charterers who had agreed a voyage charterparty for loading at Chekka, Lebanon and discharging at Algiers. Damage was allegedly sustained by the vessel during loading at Chekka, as a result of her hull being penetrated by a hidden underwater projection at the loading berth nominated by the charterers pursuant to the charterparty. It was not in dispute between the parties that: (1) Chekka was the agreed load port; (2) it was for the charterers to nominate the berth at which the vessel was to be loaded; and (3) there was no express warranty of safety in respect of either the port or the berth. However, the owners of the vessel argued that the charterparty was subject to an implied term that the charterers must nominate a safe berth at the agreed load port.

The Court of Appeal dismissed the appeal, as the owners' argument was inconsistent with certain express clauses of the charterparty and it was not necessary to imply the proposed term in order to make the contract work. In reaching this conclusion, the Court contrasted the situation where such an implication was necessary with a situation such as this, where the question was one of allocation of risk and there had been no express warranty so as to transfer the risk of such damage from the owner to the charterer.

Lord Hoffmann's test in the Privy Council has therefore rapidly been applied by the Court of Appeal in an English case. Neatly sitting with his approach to construction of contracts established in West Bromwich, it unites the assorted tests which have previously been applied for implied terms. The Court of Appeal has nevertheless reinforced the importance of necessity within the new test and demonstrated that the reformulation does not open the way to a lower threshold of reasonableness.


1 Attorney General of Belize and others v Belize Telecom Ltd and another [2009] UKPC 10

2 Mediterranean Salvage and Towage Ltd v Seamar Trading and Commerce Inc: The Reborn [2009] EWCA Civ 531

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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