Dear & Anor v Jackson

A term will be implied into a negotiated commercial agreement only where, read objectively against its background, it is necessary to give the agreement its meaning. The court must not add a term merely because it seems commercially sensible. Where reasonable people could adopt competing interpretations, there is no sufficient necessity for implication.

Particular caution is required where a professionally drafted agreement expressly addresses the relevant subject but is silent on the proposed additional protection. A further-assurances clause and the principle that a party must not render performance inoperative cannot determine or enlarge an underlying obligation whose scope is itself disputed.

The parties were shareholders in the holding company which controlled the voting shares of a Guernsey investment company. Their 2008 agreement required the voting shareholder to nominate and vote for Mr Jackson’s appointment and reappointment as a non-independent director, subject to specified termination events.

The company’s articles also permitted all the other directors to give notice requiring a director to vacate office. Mr Jackson was removed under that power. Briggs J held, on preliminary issues, that terms should be implied preventing the appellants from using that power against him unless a termination event had occurred.

The appellants appealed. The central issue was whether the agreement impliedly protected Mr Jackson against removal by the board, rather than only removal through the voting shareholder.

1. Appeal allowed. The agreement did not contain an implied term preventing the appellants from participating in Mr Jackson’s removal under article 88(e), nor an implied obligation to disapply their fiduciary duties or amend the articles.
2. Per McCombe LJ, implication and construction are objective exercises. An implied term is necessary only where the agreement, read as a whole against the relevant background, can reasonably mean no other thing. Commercial common sense may assist between available meanings, but it cannot substitute the court’s view of a more sensible bargain.
3. The contract was negotiated by legally advised parties after threatened litigation. Clause 5 expressly dealt with the use of the voting shareholder’s shares to appoint or remove directors, but did not address the distinct board power in article 88(e). That silence did not require an additional restraint. A reasonable person could regard it as a sensible bargain to limit shareholder removal while preserving a board power exercisable collectively and subject to the directors’ duties to the company.
4. Clause 5 was not futile without the proposed term. It secured Mr Jackson’s appointment and later reappointments. Article 88(e) could be exercised only with the concurrence of all the other directors, including the independent directors, acting in good faith in the company’s interests.
5. Clause 7 did not alter that result. A further-assurances covenant gives effect to obligations already identified; it cannot establish the disputed obligation. Similarly, the rule against a party rendering performance inoperative did not apply unless the true construction first showed that the proposed removal defeated the agreement.
6. Lewison LJ added that a shareholders’ agreement should not readily be construed to fetter the parties’ exercise of powers held in their different capacity as directors, or to undermine the powers which independent directors were entitled to understand from the articles. Laws LJ agreed with both judgments.

• Court of Appeal (Civil Division): allowed the appeal in [2013] EWCA Civ 89 and rejected the implied terms found below.
• High Court, Chancery Division (Briggs J): on 25 July 2012, determined preliminary issues in Mr Jackson’s favour and declared that the relevant implied terms existed.