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Friday 15 March 2013

What are you implying?

I have written in a previous posting, that lawyers are often the brunt of complaints that the contracts which they write contain too many words. A recent judgement in the Court of Appeal in the case of Dear & Griffith v. Jackson [2013] EWCA Civ 89 is a handy reminder why we are perhaps verbose.

Messrs Dear, Griffith and Jackson were shareholders in a company called PCH II, which in turn owned 100% of the voting shares in TFG. The three were also all directors (with others) of TFG.

Dear and Griffith had concerns about Jackson’s performance as an investment manager for TFG and tried to oust him. Following a flurry of litigation, a settlement was reached, recorded in a settlement agreement between the three of them. The parties agreed to ensure PCH II’s voting shares in TFG were used at the next AGM (in 2008) of TFG to procure the nomination and election of Dear, Griffith and Jackson as directors of TFG and the re-appointment of Jackson at future AGMs (provided certain termination events had not occurred). However, TFG’s articles of association contained a provision conferring power on all TFG’s directors acting together to cause a director of TFG to be removed on notice.

The directors of TFG (including Dear and Griffith) invoked the power in the articles to remove Jackson in January 2011. In December 2011, at TFG’s AGM, Dear and Griffith caused PCH II to decline to re-appoint Jackson to the board of TFG and Jackson sued under the settlement agreement.

The question for the court, in effect, was whether it was an implied term of the settlement agreement that Jackson not be removed as a director of TFG. The High Court thought that it should be so implied. Briggs J found the issue to be finely balanced but decided that the true interpretation of the settlement agreement was that Jackson should be protected from removal, not only by PCH II but also by the directors of TFG exercising a fiduciary power of removal conferred by TFG’s articles.

The Court of Appeal felt that the true test involved taking into account not what “a” reasonable person would take the settlement agreement to mean, but rather what “any” reasonable person would understand the agreement to mean. As the test was the latter, the Court effectively concluded that it was not open to it to choose one reasonable commercial outcome which accorded with common sense (by implying a term) when it was plainly the case that there was another equally reasonable solution available too (by not implying a term), and as it was not necessary for the settlement agreement to work to choose one interpretation over the other, it was not legitimate for the Court to impose an implied term on the parties.

The main judgement of the Court of Appeal (from McCombe LJ) is an important reminder then of the test the Courts should apply in determining whether to imply a term into a contract.

Perhaps the real importance of the judgement however lies in a couple of additional points made in Lewison LJ’s brief supporting judgement. The settlement agreement was of course a contract between shareholders. The articles however were conferring powers on Dear and Griffith in a different capacity, as directors. As Lewison LJ points out, a shareholder can vote his shares entirely in his own interest, but a director can only exercise his powers in the interests of the company, and “it seems to me to be more difficult to sustain an argument that terms are to be implied into an agreement made by the contracting parties in one capacity which results in fetters on his powers to act in another capacity.” Seen in this light, the mistaken reasoning of the High Court is all the more readily apparent.

Bruce Jones

MH Corporate

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