The Judicial Committee of the Privy Council Decisions

Attorney General of Belize & Ors v Belize Telecom Ltd & Anor (Belize) [2009] UKPC 10 (18 March 2009)

Privy Council Appeal No 19 of 2006

(1) Attorney General of Belize

(2) ECOM Limited

(3) Belize Telecommunications Limited Appellants

v.

(1) Belize Telecom Limited

(2) Innovative Communication Company LLC Respondents

FROM

THE COURT OF APPEAL OF

BELIZE

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL

Delivered the 18^th March 2009

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Present at the hearing:-

Lord Hoffmann

Lord Rodger of Earlsferry

Baroness Hale of Richmond

Lord Carswell

Lord Brown of Eaton-under-Heywood

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[Delivered by Lord Hoffmann]

1. This appeal raises a question on the construction of the articles of association of Belize Telecommunications Ltd ("the company"), about which there has been a difference of opinion in the courts below. The company was formed to take over the undertaking of the Belize Telecommunications Authority, a public body which had been the monopoly provider of telecommunication services in Belize. The purpose of the transfer was to enable the Government of Belize to sell all or part of its financial interest in the undertaking to private investors while retaining a degree of control. This purpose was reflected in the share structure and the rights conferred upon different classes of shareholders by the articles of association. Since the judgment of the Court of Appeal in this case, the Telecommunications Undertaking (Belize Telecommunications Ltd Operations) Vesting Act 2007 has vested the company's undertaking in a new company, Belize Telemedia Ltd, and dissolved the company. However, since the questions in dispute remain relevant to the rights of the parties, the Board will deal with the case as it stood before the Court of Appeal.
2. The authorised share capital includes one Special Rights Redeemable Preference Share of BZ$1 ("the special share"), which was issued to the Government. Article 11(A) provides that it can be transferred only to a Minister of the Government of Belize or a person acting on the written authority of the Government. Articles 11(C) and (D) give the special shareholder the right to attend and speak at shareholders' meetings, but not to vote, and to repayment of its BZ$1 capital but not to any further participation in the capital or profits of the company. In other words, the special share confers no economic interest in the company. In itself, it is simply an instrument of control. As the existence of such a share sometimes inhibits private investors from taking up ordinary shares, article 11(E) gives the special shareholder (with the consent of the Government) power to require the company to redeem and thereby extinguish the special share.
3. The articles protect the interests of the special shareholder at three levels: first, through special rights to appoint and remove directors; secondly, through restrictions on what a majority of the board can do without the special shareholder's consent and thirdly, through restrictions on what a majority of the shareholders in general meeting can do without its consent. This appeal is concerned with the first level of protection, namely, the right to appoint and remove directors. But, in order to appreciate the scheme of the articles as a whole, it is necessary to look also at the other two forms of protection.
4. The ordinary share capital, apart from the special share, is divided into two classes designated B and C. Article 85 provides that there shall be eight directors. Two (designated B directors) are elected and may be removed by a majority of the B shareholders: articles 90(B) and (C). Up to four (designated C directors) are elected and may be removed by a majority of the C shareholders (articles 90(D)(i) and 90(E)). Up to two (designated Government Appointed Directors) are appointed and may be removed by the special shareholder: article 88(A).
5. It was however contemplated that, at least in the first instance, the Government as special shareholder would also retain a substantial economic interest through a holding of C ordinary shares. The articles therefore give the special shareholder additional powers or protection if and so long as it also holds a specified proportion of the issued share capital. At the board level, this is reflected in article 90(D)(ii):

"The holder of the Special Share shall so long as it is the holder of 'C' Ordinary shares amounting to 37.5% or more of the issued share capital of the Company be entitled at any time by written notice served upon the Company to appoint two of the Directors designated 'C' Directors and by like notice to remove any Director so appointed and appoint another in his or her place."

6. In other words, while the special shareholder also holds C shares amounting to 37.5% or more of the issued share capital, it is entitled to appoint or remove two of the four C directors, whether or not it holds a majority of C shares. In such a case, the holders of the majority of the C shares are reduced to appointing only the other two of the four directors allocated to the C shareholders. Ordinary C directors may be removed from office by a majority of the C directors (article 90(E)) or by extraordinary resolution (article 92(A)) but C directors appointed by the special shareholder under article 90(D)(ii) (who will be called "special C directors") can be removed only by a special shareholder which holds the requisite number of C shares.
7. In addition, at any time when the special shareholder holds C shares amounting to 37.5% or more of the issued share capital, it is entitled to appoint any Government Appointed Director or special C director as non-executive chairman.
8. Restrictions on the power of the board to act by a majority are contained in article 113. The Government Appointed Directors have the right to veto any resolution in respect of a number of matters listed in paragraph (B) at any time at which the special shareholder also holds C shares amounting to 25% of more of the issued share capital. The listed matters included the disposal or acquisition of valuable assets, the conclusion of unusual or long term contracts and the appointment of senior staff.
9. Finally, the restrictions on the powers of the majority of shareholders in general meeting are contained in articles 8 and 11. Article 8 gives the special shareholder, at any time when it holds C shares amounting to 25% or more of the issued share capital, a veto over resolutions relating to various specified matters and article 11(B) lists a number of articles which cannot be amended without the consent in writing of the special shareholder, whether it holds any other shares or not.
10. It will thus be seen that the extent to which the interests of the special shareholder are protected is carefully graduated in accordance with its economic interest in the company. If it holds no other shares at all, it can appoint two directors and block shareholder resolutions to amend certain articles. If its C shareholding amounts to 25% or more of the issued share capital, it can also block important board and shareholder resolutions. And if its C shareholding amounts to 37.5% or more, it can also take over the appointment of two of the four C directors otherwise appointed by a majority of the C shareholders and nominate the non-executive chairman.
11. The facts which have given rise to the present dispute may be shortly stated. In 2004 the first respondent, Belize Telecom Ltd ("BT"), acquired from the Government the special share and a majority of the issued share capital, including majorities of both the B and C ordinary shares. It purported to appoint all eight directors: two as special shareholder tout court, two as majority B shareholder; two as special shareholder holding more than 37.5% of the issued share capital and two as majority C shareholder. There appears to have been some dispute about the validity of at least some of these appointments, but these questions have not been raised before the Board. It will therefore be assumed that the directors were validly appointed and, in particular, the two special C directors were properly appointed by BT under article 90(D)(ii).
12. BT pledged the ordinary shares to the Government to secure borrowings which had financed the purchase. Within less than a year, however, it defaulted on its obligations. On 9 February 2005, pursuant to the pledge agreement, the Government took back a substantial number of the ordinary shares. The result was that BT was left with the special share and C shares amounting to less than 37.5% of the issued share capital.
13. The question which then arose was whether the two special C directors appointed by BT remained members of the board. Under the articles, the only person who has power to remove them is the person who would have had power to appoint them, namely, a special shareholder holding C shares amounting to 37.5% of the issued share capital. But the result of the default and seizure was that no such person existed. Nor is there any express provision in the articles that in such circumstances a special C director vacates office. Article 112 deals generally with the circumstances in which the office of a director (however appointed) is vacated:

"112. The office of director shall be vacated, if the director:

(a) holds any other office of profit under the company except that of managing director or manager; or

(b) becomes bankrupt; or

(c) is found lunatic or become of unsound mind; or

(d) is concerned or participates in the profits of any contract with the company…"

14. But there is nothing which deals expressly with the position of a special C director when the special shareholder who appointed him no longer holds enough C ordinary shares. Nor, for that matter, do the articles deal with the position of Government Appointed Directors when the special share has been redeemed and no longer exists. The consequence, say the respondents, is that the directors are irremovable. Until they choose to resign, or fall foul of article 112, or die, they remain directors. The appellants say that this would be an absurd result and the articles should be construed as providing by implication that a director appointed by virtue of a specified shareholding vacates his office if there is no longer any holder of such a shareholding.
15. In the Supreme Court, Conteh CJ thought that such a term should be implied. But the Court of Appeal disagreed. Carey JA said that there was no room for reading words into the articles and no necessity to do so. Morrison JA pointed out, correctly, that article 90(D)(ii) made provision for the appointment and removal of special C directors but not for their tenure of office. The construction favoured by the Chief Justice could not be "derived from the language of the articles."
16. Before discussing in greater detail the reasoning of the Court of Appeal, the Board will make some general observations about the process of implication. The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913. It is this objective meaning which is conventionally called the intention of the parties, or the intention of Parliament, or the intention of whatever person or body was or is deemed to have been the author of the instrument.
17. The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.
18. In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.
19. The proposition that the implication of a term is an exercise in the construction of the instrument as a whole is not only a matter of logic (since a court has no power to alter what the instrument means) but also well supported by authority. In Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601, 609 Lord Pearson, with whom Lord Guest and Lord Diplock agreed, said:

"[T]he court does not make a contract for the parties. The court will not even improve the contract which the parties have made for themselves, however desirable the improvement might be. The court's function is to interpret and apply the contract which the parties have made for themselves. If the express terms are perfectly clear and free from ambiguity, there is no choice to be made between different possible meanings: the clear terms must be applied even if the court thinks some other terms would have been more suitable. An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves."

20. More recently, in Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459, Lord Steyn said:

"If a term is to be implied, it could only be a term implied from the language of [the instrument] read in its commercial setting."

21. It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson's speech that this question can be reformulated in various ways which a court may find helpful in providing an answer – the implied term must "go without saying", it must be "necessary to give business efficacy to the contract" and so on – but these are not in the Board's opinion 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?
22. There are dangers in treating these alternative formulations of the question as if they had a life of their own. Take, for example, the question of whether the implied term is "necessary to give business efficacy" to the contract. That formulation serves to underline two important points. The first, conveyed by the use of the word "business", is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. That was the basis upon which Equitable Life Assurance Society v Hyman [2002] 1 AC 408 was decided. The second, conveyed by the use of the word "necessary", is that it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.
23. The danger lies, however, in detaching the phrase "necessary to give business efficacy" from the basic process of construction of the instrument. It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. Lord Steyn made this point in the Equitable Life case (at p. 459) when he said that in that case an implication was necessary "to give effect to the reasonable expectations of the parties."
24. The same point had been made many years earlier by Bowen LJ in his well known formulation in The Moorcock (1889) 14 PD 64, 68:

"In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men"

25. Likewise, the requirement that the implied term must "go without saying" is no more than another way of saying that, although the instrument does not expressly say so, that is what a reasonable person would understand it to mean. Any attempt to make more of this requirement runs the risk of diverting attention from the objectivity which informs the whole process of construction into speculation about what the actual parties to the contract or authors (or supposed authors) of the instrument would have thought about the proposed implication. The imaginary conversation with an officious bystander in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227 is celebrated throughout the common law world. Like the phrase "necessary to give business efficacy", it vividly emphasises the need for the court to be satisfied that the proposed implication spells out what the contact would reasonably be understood to mean. But it carries the danger of barren argument over how the actual parties would have reacted to the proposed amendment. That, in the Board's opinion, is irrelevant. Likewise, it is not necessary that the need for the implied term should be obvious in the sense of being immediately apparent, even upon a superficial consideration of the terms of the contract and the relevant background. The need for an implied term not infrequently arises when the draftsman of a complicated instrument has omitted to make express provision for some event because he has not fully thought through the contingencies which might arise, even though it is obvious after a careful consideration of the express terms and the background that only one answer would be consistent with the rest of the instrument. In such circumstances, the fact that the actual parties might have said to the officious bystander "Could you please explain that again?" does not matter.
26. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 282-283 Lord Simon of Glaisdale, giving the advice of the majority of the Board, said that it was "not … necessary to review exhaustively the authorities on the implication of a term in a contract" but that the following conditions ("which may overlap") must be satisfied:

"(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying' (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract".

27. The Board considers that this list is best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so. The Board has already discussed the significance of "necessary to give business efficacy" and "goes without saying". As for the other formulations, the fact that the proposed implied term would be inequitable or unreasonable, or contradict what the parties have expressly said, or is incapable of clear expression, are all good reasons for saying that a reasonable man would not have understood that to be what the instrument meant.
28. The Board therefore turns to consider the question raised by the articles of association. Two things are immediately apparent. The first is that the board has been constructed so that its membership will reflect the interests of the various participants in the company: the political interest of the Government, represented through its special share; the economic interest (if any) of the Government, represented by its holding of C shares; the economic interests of the ordinary B and C shareholders. The second is that the powers which the articles confer upon the Government (or its successor as special shareholder acting upon its written instructions: see article 11(A)) are carefully graduated according to its economic interest in the company at the relevant time. Thus, the power to block certain board resolutions in article 113 is exercisable "at any time at which the holder of the special share is the holder of C Ordinary shares amounting to 25% or more of the issued ordinary share capital". The power to block certain shareholder resolutions in article 8 is likewise exercisable "at any time" when the special shareholder has a 25% or more holding. And the power to appoint and remove special C directors is exercisable "at any time" when the special shareholder has a 37.5% or more holding.
29. In the case of board and shareholder resolutions, the relevant time for determining whether a blocking power exists is of course the time at which the resolution is proposed. In the case of appointments to the board, the draftsman appears to have assumed that it would be the time at which the appointment was made or the director was to be removed. In some cases, that would be sufficient to ensure that the board at any given time reflected the appropriate shareholder interests. For example, articles 90(B) and (C) give a majority of B shareholders the right to appoint and remove two directors. This is enough to ensure that the B directors will at any given time represent the interests of a majority of the B shareholders. If the majority lose confidence in their directors, or if there is a transfer of B shares which results in a different majority, it will always be open to the majority to remove the directors in office and appoint others. The same is true of the ordinary C directors appointed and removable by a majority of C shareholders under articles 90(D)(i) and 90(E).
30. The situation with which the articles do not expressly deal is where a change in shareholding results in the board no longer reflecting the appropriate shareholder interests, but without enabling this to be corrected by exercise of the power to remove directors. Assume, for example, that the special shareholder exercises its power under article 11(E) to require redemption of the special share. What then happens to the Government Appointed Directors appointed under article 88(A)? They cannot be removed from office because there is no longer a special shareholder who has power to do so. Does that mean that they remain in office indefinitely? The Board considers that, if one considers the role of the Government Appointed Directors and the policy of giving the Government the power to require redemption of the special share, namely, to enable it to relinquish its influence over the conduct of the company's business, the articles cannot reasonably mean that the Government Appointed Directors should remain in office after the special share has ceased to exist. They must be read as providing by implication that when the special share goes, the Government Appointed Directors go with it. In the opinion of the Board it is no answer to say that the special shareholder could have thought of the problem in advance and removed the Government Appointed Directors before redemption. No doubt he could, but the question is what the articles mean in the situation in which he has not done so. Nor is it relevant that the articles could be amended. They must be construed as they stand.
31. If, as the Board thinks, it would plainly be necessary to imply such a term in relation to the Government Appointed Directors, it must follow that upon the redemption of the special share, the special C directors will also cease to hold office. They are also there by virtue of the special share and when there is no longer a special share, there will again be no one who has power under the articles to remove them. That means that the whole basis upon which they are distinguished from ordinary C directors appointed by the majority of the C shareholders under article 90(D)(i) has ceased to exist. It is true that article 90(E) says that C directors shall hold office "subject only to article 112", but that cannot in the Board's opinion be construed as contradicting the proposed implied term, to which the draftsman plainly did not address his mind. In any case, the words "subject only" cannot be read literally because, for example, the provisions for retirement by rotation in article 94 are expressly applied to C directors (other than special C directors.)
32. If implication is necessary to prevent what would otherwise be absurd consequences following from redemption of the special share, the Board considers that there is no difficulty about applying the same principle to the case in which the special shareholder continues to exist but no longer has the 37.5% holding which would entitle him to appoint and remove special C directors. In such a case too, the implication is required to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors, namely to ensure that the board reflects the appropriate shareholder interests in accordance with the scheme laid out in the articles.
33. The Court of Appeal felt unable on the authorities to read the articles as having such a meaning. Morrison JA referred to Holmes v Keys [1959] Ch 199, 215, where Jenkins LJ said:

"I think that the articles of association of the company should be regarded as a business document and should be construed so as to give them reasonable business efficacy, where a construction tending to that result is admissible on the language of the articles, in preference to a result which would or might prove unworkable."

34. Both Carey JA and Morrison JA thought that the meaning which the Chief Justice had adopted was not "admissible on the language of the articles" ("requires remarkable mental gymnastics", said Carey JA). It should be noted, however, that Holmes v Keys was not a case about an implied term. It was a dispute over the meaning of a particular phrase in the articles, namely, whether, in an article which required a director to acquire qualifying shares "within two months after election", the date of "election" meant the date of the general meeting or the date on which the result of the election was declared. In a case such as that, in which it is argued that language should be given a certain meaning, it is usually essential (unless there has been an obvious mistake) that the language should, according to ordinary conventional usage, be capable of bearing that meaning. In the case of an implied term, however, the question is not what any particular language in the instrument means but whether, without it having been expressly stated, that is the meaning of the instrument.
35. The other case to which Morrison JA referred was Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693. This was a case about the extent of the background which is admissible in construing articles of association. The company was set up to acquire and manage a property divided into flats which also included "amenity areas" (tennis courts, swimming pool, gardens). It was argued that there should be implied into the articles of association an obligation on the part of each flat owner/member to contribute to the expenses of maintaining the amenity areas. The implication was said to be derived from the circumstances in which the property was acquired and the terms of the conveyance to the company.
36. The decision of the Court of Appeal was that these background facts were not admissible to construe the meaning of the articles. Without them, there was not the slightest basis for implying such an obligation. Because the articles are required to be registered, addressed to anyone who wishes to inspect them, the admissible background for the purposes of construction must be limited to what any reader would reasonably be supposed to know. It cannot include extrinsic facts which were known only to some of the people involved in the formation of the company.
37. The Board does not consider that this principle has any application in the present case. The implication as to the composition of the board is not based upon extrinsic evidence of which only a limited number of people would have known but upon the scheme of the articles themselves and, to a very limited extent, such background as was apparent from the memorandum of association and everyone in Belize would have known, namely that telecommunications had been a state monopoly and that the company was part of a scheme of privatisation.
38. For these reasons the Board will humbly advise Her Majesty that the appeal should be allowed with costs before the Board and in the Court of Appeal and the declarations made by the Chief Justice restored.