UK: implied terms and the articles of association

Earlier this week the Judicial Committee of the Privy Council handed down its opinion in Attorney General of Belize & Ors v Belize Telecom Ltd & Anor (Belize) [2009] UKPC 11, a case on appeal from the Belize Court of Appeal concerning implied terms and the articles of association.

A company had been formed to take over a public body - the Belize Telecommunications Authority - in order that the Government could sell its financial interest. Through a special shareholding the Government retained a degree of control through the right to appoint directors. The company's articles contained provisions about the appointment of such directors but were silent on the circumstances in which such appointees would cease to hold office. 

The question before the courts was whether a term should be implied in the articles of association whereby directors appointed by the holder of a special share would cease to hold office where that special share was redeemed or the right to appoint no longer existed. In the Belize Supreme Court, the trial judge implied such a term. The Belize Court of Appeal disagreed. 

Lord Hoffmann, delivering the Judicial Committee's opinion, held that a term requiring the directors to vacate office should be implied. His Lordship explored the circumstances in which terms could be implied into contracts and observed (para. [30[):

... if one considers the role of the Government Appointed Directors and the policy of giving the Government the power to require redemption of the special share, namely, to enable it to relinquish its influence over the conduct of the company's business, the articles cannot reasonably mean that the Government Appointed Directors should remain in office after the special share has ceased to exist. They must be read as providing by implication that when the special share goes, the Government Appointed Directors go with it. In the opinion of the Board it is no answer to say that the special shareholder could have thought of the problem in advance and removed the Government Appointed Directors before redemption. No doubt he could, but the question is what the articles mean in the situation in which he has not done so. Nor is it relevant that the articles could be amended. They must be construed as they stand".

The English courts have held that terms cannot be implied into the articles of association based on extrinsic evidence (see, e.g., Dashfield & Anor v Davidson & Ors [2008] EWHC 486 (Ch)) and in this regard Lord Hoffmann observed (para. [37]):

The implication as to the composition of the board is not based upon extrinsic evidence of which only a limited number of people would have known but upon the scheme of the articles themselves and, to a very limited extent, such background as was apparent from the memorandum of association and everyone in Belize would have known, namely that telecommunications had been a state monopoly and that the company was part of a scheme of privatisation"