Equitable Life Assurance Society v Hyman

A contractual discretion, however widely expressed, must be exercised consistently with the instrument that confers it. An individualised term may be implied where, on construction of the agreement as a whole in its commercial setting, the implication is strictly necessary and does not conflict with express terms.

A discretion over discretionary benefits cannot be used to deprive an express contractual guarantee of its substantial value. Where the guarantee protects against an identified commercial risk, the discretion must be exercised consistently with that purpose. The restriction cannot be evaded by adopting a different method which achieves the same prohibited result.

The Society issued with-profits pension policies containing guaranteed annuity rates. When market annuity rates fell below those guarantees, its directors used their discretion under article 65 of the Society's articles of association to award different final bonuses according to whether a policyholder selected the guaranteed annuity or an alternative benefit. The policy was intended to equalise the total value received and thereby substantially neutralised the advantage of the guarantee.

Sir Richard Scott V.-C. granted declarations affirming the directors' power to adopt the differential policy. The Court of Appeal, by a majority of two to one, allowed the representative policyholder's appeal in Equitable Life Assurance Society v Hyman [2000] 2 W.L.R. 798. The Society appealed. The central issue was whether article 65, read with the policies and their commercial purpose, permitted the directors to use the bonus discretion to override or undermine the guaranteed rates.

1. Disposition. The House unanimously dismissed the Society's appeal. Lord Steyn and Lord Cooke of Thorndon delivered the substantive speeches. Lord Slynn of Hadley, Lord Hoffmann and Lord Hobhouse of Woodborough agreed with the reasons given in both speeches. No further declaratory relief was required.

2. Effect of the policy. Per Lord Steyn, the guaranteed rates had to be used to calculate the contractual annuity. The differential-bonus practice instead used the current market rate to determine the annuity and used the guaranteed rate only to reduce the final bonus. Taken by itself, that practice was inconsistent with the policyholder's contractual rights. The remaining question was whether article 65 authorised it.

3. Implication and strict necessity. Per Lord Steyn, interpretation assigns language a meaning it can legitimately bear, while implication fills a gap. Article 65 contained no relevant express restriction, so the required limitation could arise only as an individualised implied term. Drawing on Luxor (Eastbourne) Ltd v Cooper [1941] A.C. 108 and Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co. Ltd [1997] AC 191, Lord Steyn held that the agreement must be construed as a whole in its commercial setting. The implication had to be strictly necessary and could not conflict with express terms.

4. Application. Final bonuses were not a bounty but a significant part of the consideration for the premiums. The bonus powers were conferred for policyholders' benefit, while the evident commercial object of the guaranteed rates was protection against falling market rates. It was strictly necessary to imply a restriction preventing the directors from using their discretion to override or undermine that protection. By making the bonus depend upon the policyholder's exercise of the guaranteed right, the directors acted in breach of article 65(1).

5. Alternative proper-purpose reasoning. Per Lord Cooke, a legal discretion, however widely worded, cannot be exercised for purposes contrary to the instrument conferring it. He treated Padfield v Minister of Agriculture, Fisheries and Food [1968] AC 997 as an administrative-law illustration and applied the corresponding private-law principle exemplified by Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. Article 65 and the policies had to be read together. A discriminatory bonus scheme which subverted the basis of the policies was an inadmissible use of the discretion and a breach of contract.

6. Alternative devices and subsidiary point. Per Lord Steyn, the Society could not avoid the implied restriction by varying bonuses according to whether a policy contained guaranteed rates rather than according to the benefit selected. That form of ring-fencing would still eliminate the guarantee's substantial value. He also rejected the argument that the additional final bonus attached to an alternative benefit was not a bonus related to the policy.

1. House of Lords: In Equitable Life Assurance Society v Hyman [2000] UKHL 39, reported at [2002] 1 AC 408, the House unanimously dismissed the Society's appeal and considered that no further declaratory relief was required.
2. Court of Appeal: In Equitable Life Assurance Society v Hyman [2000] 2 W.L.R. 798, the court allowed the representative policyholder's appeal by a majority of two to one and granted a declaration denying the directors' claimed power to adopt the differential-bonus policy.
3. High Court (Chancery Division): Sir Richard Scott V.-C. granted declarations affirming the validity of the directors' decisions.