Equitable Life Assurance Society v. Hyman

The House of Lords held that the directors' wide statutory contractual discretion under article 65 of the Society's articles could not be exercised so as to undermine or negate the contractual protection given by guaranteed annuity rates (GARs) in with-profits policies. The court treated the question as one of construction and implied a term into article 65(1) as strictly necessary to give effect to the reasonable expectations of policyholders: directors may not allocate final (terminal) bonuses in a way which has the effect of depriving GAR policyholders of the substantial benefit of their guarantees. The court also rejected the alternative device of "ring-fencing" by differing bonuses simply between GAR and non-GAR policies as equally impermissible.

This was an appeal by the Equitable Life Assurance Society against the Court of Appeal's decision that the Society had acted unlawfully in allocating different levels of final bonus to policyholders holding policies with guaranteed annuity rates depending on whether they elected the contractual annuity or took benefits in fund form. The Society had adopted a differential final-bonus policy after market annuity rates fell below guaranteed rates, intending to equalise outcomes between GAR policyholders and other with-profits policyholders.

The originating summons, issued 15 January 1999, sought declarations that (1) the directors were entitled under article 65 to apply different final bonuses to GAR policyholders according to the election they made at maturity, and (2) that past exercises of that discretion for the period 1 April 1994 to 31 March 1999 were valid. The Chancery Division (Sir Richard Scott V.-C.) upheld the Society and made declarations in its favour. The Court of Appeal ([2000] 2 W.L.R. 798) allowed the policyholders' appeal by 2:1, holding the differential treatment impermissible. The House of Lords heard the appeal.

Issues framed by the court included:

• whether the policy documents precluded differential final bonuses dependant on the policyholder's election and, if not,
• whether a term should be implied into article 65(1) or otherwise that directors may not exercise their discretion for a purpose subverting the guarantees.

The House emphasised that the enquiry was constructional. While article 65(1) contained broad language, the court held it was strictly necessary, to give effect to the reasonable expectations of the contracting parties, to imply a limitation preventing the directors from allocating final bonuses in a way that nullified the commercial promise of GARs. The court applied the strict necessity test for implication of terms and the established principle that a discretion cannot be exercised for a purpose contrary to the instrument conferring it. The suggested alternative of adjusting bonuses by reference simply to whether a policy contained a GAR (the "ring-fencing" device) was rejected as equally inconsistent with the implied restriction. The House therefore dismissed the Society's appeal and left no declaratory relief to be granted by the House.

Appeal dismissed. The House held that, on construction of the articles read in their commercial context, it was strictly necessary to imply a term into article 65(1) preventing the directors from exercising their discretion to allocate final bonuses in a manner which has the effect of overriding or substantially depriving GAR policyholders of the contractual benefit of guaranteed annuity rates; the alternative "ring-fencing" device was likewise impermissible.

Originating summons issued 15 January 1999; trial before Sir Richard Scott V.-C. (trial 5-7 July 1999; judgment 9 September 1999) — Vice-Chancellor granted declarations for the Society. Court of Appeal allowed the representative policyholder's appeal (2:1) — Equitable Life Assurance Society v. Hyman [2000] 2 W.L.R. 798. House of Lords appeal dismissed on 20 July 2000 [2000] UKHL 39.