Judgments - Equitable Life Assurance Society v. Hyman

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    The enquiry is entirely constructional in nature: proceeding from the express terms of article 65, viewed against its objective setting, the question is whether the implication is strictly necessary. My Lords, as counsel for the GAR policyholders observed, final bonuses are not bounty. They are a significant part of the consideration for the premiums paid. And the directors' discretions as to the amount and distribution of bonuses are conferred for the benefit of policyholders. In this context the self-evident commercial object of the inclusion of guaranteed rates in the policy is to protect the policyholder against a fall in market annuity rates by ensuring that if the fall occurs he will be better off than he would have been with market rates. The choice is given to the GAR policyholder and not to the Society. It cannot be seriously doubted that the provision for guaranteed annuity rates was a good selling point in the marketing by the Society of the GAR policies. It is also obvious that it would have been a significant attraction for purchasers of GAR policies. The Society points out that no special charge was made for the inclusion in the policy of GAR provisions. So be it. This factor does not alter the reasonable expectations of the parties. The supposition of the parties must be presumed to have been that the directors would not exercise their discretion in conflict with contractual rights. These are the circumstances in which the directors of the Society resolved upon a differential policy which was designed to deprive the relevant guarantees of any substantial value. In my judgment an implication precluding the use of the directors' discretion in this way is strictly necessary. The implication is essential to give effect to the reasonable expectations of the parties. The stringent test applicable to the implication of terms is satisfied.

    In substantial agreement with Lord Woolf M.R. I would hold that the directors were not entitled to adopt a principle of making the final bonuses of GAR policyholders dependent on how they exercised their rights under the policy. In adopting the principle of a differential policy in respect of GAR policyholders the directors acted in breach of article 65(1).

The "ring fencing" issue

    There remains the suggestion by Waller L.J. that the Society could lawfully have declared a differential bonus which varied not according to the form in which the benefits were taken, but according to whether the policy did or did not include GARs. It is agreed that the House should deal with this issue. If the suggestion of Waller L.J. is sound in law, the directors could in that way erode the substantial value of the guarantees by different means. If my conclusion on the principal arguments is right, it must follow that this suggested route is not open to the Society. After all, the object would still be to eliminate as far as possible any benefit attributable to the inclusion of a GAR in the policy. In my view such a device is precluded by the very term which I have held to be implied in article 65. I would hold that the suggested course is not open to the Society.

Disposal of the appeal

    I would dismiss the appeal of the Society. Given the terms of this judgment I do not consider that any declaratory relief need be granted by the House.


My Lords,

    I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Steyn and Lord Cooke of Thorndon. For the reasons they give I, too, would dismiss the appeal.


My Lords,

    In his speech, which I have had the advantage of seeing in draft, my noble and learned friend Lord Steyn solves this case by invoking the principle that an implied term may be derived from the language of a document read in its particular factual setting. I agree with that way of viewing the case; but the same conclusion may be reached by starting from the principle that no legal discretion, however widely worded (here, by article 65(1), the directors may apportion bonuses "on such principles, and by such methods, as they may from time to time determine"), can be exercised for purposes contrary to those of the instrument by which it is conferred.

    As Lord Woolf M.R. pointed out in his judgment in the Court of Appeal in this case [2000] 2 W.L.R. 798, at p. 806, this principle is common to administrative law (e.g. Padfield v. Minister of Agriculture, Fisheries and Food [1968] A.C. 997) and sundry fields of private law (e.g. Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] A.C. 821). In an administrative law context, violation of the principle may result in no more than invalidity; in a contractual context, it may result in a breach of contract, which should be rectified. In this case I think that the apportionment of the final bonus for an inadmissible purpose did result in such a breach of contract. Mr. Sumption Q.C. for the respondent, when pressed with the point, did not shrink from that proposition.

    When policies such as the one now under consideration have been issued, the wide powers of allotment of bonuses conferred on the directors by article 65(1) have to be exercised in the light of those policies. The powers and the policies have to be read in conjunction. The directors will not be entitled to exercise the powers for a purpose subverting the basis of the policies, fairly interpreted.

    In his dissenting judgment in the Court of Appeal Morritt L.J. explained the purpose of the change of practice from 1994 onwards as follows, [2000] 2 W.L.R. 798, 819:

    "73. In December 1993 the directors of the Society decided to amend the declaration of bonus for the calendar year 1994 so as to provide for the first time for a differential final bonus dependent on whether the grantee took the guaranteed annuity or exercised an option to take an alternative benefit from either the Society or from another life office. The reason for the change was the decline in annuity rates to a level below the guaranteed rate. The effect of the change was to allot to those who took the guaranteed annuity a lesser final bonus than that allotted to those who took some alternative benefit. The purpose of the change was to ensure that the annuity benefit available to those who decided to take alternative benefits was no less than that available to those who chose the guaranteed annuity."

More than once in his judgment Morritt L.J. repeated that the purpose was equalisation of the benefits in annuity form: see pp. 823 and 824.

    Before your Lordships Appellate Committee, in the course of her reply Miss Gloster Q.C., whose argument for the Society showed a full grasp of the intricacies of a case that has its recondite depths, repudiated that description of the purpose. She preferred the description given by Sir Richard Scott V.-C. in the Chancery Division at paragraph 41: "to bring the value of the benefits being taken by the policyholder on maturity up to a level that equates to the policyholder's notional 'asset share' in the Society's with-profits fund."

    It seems to me that both descriptions come to the same thing. The Vice-Chancellor's description introduces the concept of asset share, which is nowhere mentioned in the policy but dominates the approach of the directors. Because market rates have fallen below "guaranteed" (i.e. promised) annuity rates, the directors adopted a discriminatory scheme for final bonuses. The holder of a GAR policy who elects on maturity to receive an annuity from the Society is allotted a bonus lower than the bonus that would have been allotted to him if he had elected then to purchase an annuity from the Society or another office. The right to a GAR is thus treated as working to the disadvantage of a policyholder who takes the annuity.

    My Lords, I cannot think that such a result is consistent with the purpose of a GAR policy. On the contrary I agree with Lord Woolf M.R. (as he then was) that the assumption on which the policy was based was that, when current rates fall below the GAR, the annuity which the policyholder should receive would be higher than if there was no GAR. Although discretionary and uncertain, bonuses are a very significant part of the benefits which policyholders expect. The attractions of a GAR policy would be much diminished if it were explained that adverse discrimination in bonuses might be involved. A reasonable reader in the shoes of the policyholder would not understand this unless it had been clearly specified in the policy. In my opinion the general discretion in article 65(1) is inadequate to justify such an adjustment of policy benefits.

    For these short but I think compelling reasons, and the other reasons given by my noble and learned friend Lord Steyn, I would dismiss this appeal.


My Lords,

    For the reasons given by my noble and learned friends Lord Steyn and Lord Cooke of Thorndon, I too would dismiss this appeal.


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