Lord Hoffmann has spent his career clarifying difficult areas of the law. On the centrally important question of how to interpret or construe a document his judgment in Investors Compensation Scheme v West Bromwich Building Society is the key authority. He explained that the role of the court is to discover the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the document was addressed.
Before Lord Hoffmann retired earlier this year, he delivered an important judgement in the Privy Council (Attorney General of Belize v Belize Telecom Limited [2009] UKPC 10). In that case, the Privy Council was asked to imply a term into the Articles of Association of a company. The issue of implied terms frequently arises where, as in this case, a document has not expressly provided for what is to happen when a particular event occurs. A subsequent disagreement reveals that there are eventualities for which the parties did not provide when they drafted the contract.
In this case, the Court implied a term into the Articles to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors.
Lord Hoffmann made clear that when a court comes to consider whether a term is to be implied into a contract or other instrument, then this is no more and no less than an exercise in the construction of that instrument. The implication of the term is not an addition to the instrument. It only spells out what the document means.
Lord Hoffmann says that his central proposition (that the implication of a term is an exercise in the construction of the document as a whole) “is not only a matter of logic since a court has no power to alter what the document means but [is] also well supported by authority.” However, it is interesting to note that the current edition of Chitty on Contracts lacks his clarity of thinking. Chitty asserts that there are two alternative grounds on which a term may be implied: the first where it is necessary to give business efficacy to the contract, and, secondly, where the term implied represents the obvious, but unexpressed, intention of the parties. In Lord Hoffmann’s opinion these questions are not to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean? Lord Hoffmann points out the dangers in treating the Chitty formulations of the question as if they had a life of their own and detaching them from the basic process of construction of the document. By way of example, Lord Hoffmann refers to the imaginary conversation with an officious bystander which is so notorious throughout the common law world. He concedes that that test emphasises the need for the court to be satisfied that the proposed implication spells out what the contract would reasonably be understood to mean. However, he also points to the danger of a barren argument over how the actual parties would have reacted to the proposed amendment.
Even though the Privy Council is persuasive authority only, in one of his final judgments before he retired, Lord Hoffmann has probably recast the ground rules on the implications of terms into a contract.
Gibson & Co
12 April 2009