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Filling the gap.

The Law Lords seem to be marking their transformation into the Supreme Court by restating some important fundamental legal principles. They have made it clear that in both English and Scots law only limited recourse may be had to preliminary materials in interpreting a finally concluded transaction. (1) Damages are to be strictly compensatory and this overrides the supposed principle of certainty in commercial law (2) and now in an appeal from Belize, the Law Lords sitting as the Judicial Committee of the Privy Council, have sought to solve the problem when there has been a failure to express in words some clearly required term of a transaction. (3)

This goes back to the case of The Moorcock (4) in which the crucial passage reads:
   In business transactions such as this, what the law desires to
   effect by implication is to give such business efficacy to the
   transaction as must have been intended at all events by both
   parties who are businessmen. (5)

Another well-known test also stresses the need for implication being obvious. It runs:
   Prima facie that which in a contract is left to be implied and need
   not be expressed is something so obvious that it goes without
   saying so that if while the parties were making their bargain an
   officious bystander were to suggest some express provision for it
   in their agreement they would testily suppress him with a common
   "Oh of course." (6)

The facts to which the Judicial Committee Board had to apply these and similar tests were that Belize Telecom was a public corporation being prepared for privatisation under a complex scheme of shareholding. This included a 'special share' giving the holders, so long as they held a sufficient number of other share rights, to appoint directors. The holders of the 'special share' failed to hold the qualifying shares and so were disqualified from appointing or removing directors, who became almost irremovable as there was no provision coveting this. The court at first instance held that a term could be implied to allow removal, but the Belize Court of Appeal held that the scheme of privatisation was so full that there was no room for any such term. On further appeal to the Judicial Committee, the judgment of the court below was restored. (7)

Lord Hoffmann, delivering the advice of the Board, said that the court had no power to improve the document, but merely to discover what it meant, which might not always be what the parties intended, but rather the meaning it would convey to "a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument was addressed", this "objective meaning is conventionally called the intention of the parties, or the intention of Parliament", or whoever was the author. (8) All the court is doing is spelling out the language of the instrument in its commercial setting, and the various formulae such as "giving business efficacy" are merely different ways of expressing this. (9) This was true also of "going without saying" in the 'officious bystander' test, (10) though Lord Hoffmann somewhat disapproved of this test, because it carried "the risk of barren argument over how the actual parties would have reacted to the proposed implication", this being in the view of the Board "irrelevant". (11)

Lord Hoffmann reviewed the privatisation document which took the form of company articles, finding that they sought to achieve a balance between the economic interests of those concerned, but despite the detail and skill of the drafting, provision had been omitted for the situation under appeal where vacancies in the board of company directors made it at first sight impossible to fill vacancies amongst the directors or dismiss holders of the office. The Privy Council Board thought that this was an absurd situation and that a term should be implied allowing for appointment and dismissal amongst the directors, this being derived from the rest of the articles, and to a limited extent, such background as could be seen from other company documents and the fact that everyone in Belize would have known that telecommunications had been a State monopoly and that the company was being privatised.

This case is a reminder that even elaborate and careful drafting may not eliminate serious gaps in legal documents and litigation to fill them may not always answer to the expectations of the parties. Helpful authority cited by Lord Hoffmann comes in B.P. Refinery v. Hastings (12) where Lord Simon of Glaisdale said that an implied term should meet the following conditions "which may overlap":

1. It must be reasonable and equitable;

2. It must 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.

Lord Hoffmann thought that this should be treated as a single unified test, but in the Belize case he was prepared to override the last condition of noncontradiction, since the Belize privatisation articles did provide that the relevant directors could be removed only subject to a provision which was not in terms satisfied. Lord Hoffmann circumvented this by saying that the draftsman had not addressed his mind to the difficulty under appeal and the relevant provision could be regarded as qualified by others dealing with the position of other directors.

It is relatively easy to justify the decision of the Law Lords on damages, since that discourages gold-digging litigation. Again, the restrictions on the use of preliminary materials will shorten and cheapen litigation, but 'filling the gap' leaves many difficult questions open. Treating the intention of the parties as irrelevant seems not unakin to the forbidden process of making a contract for the parties. The questions of the audience to which the document is addressed and its degree of interest and information seems to give much scope for dubious argument over essentially vague ground and, unlike the restrictions on preliminary materials in interpretation, seems not unlikely to lengthen and increase the cost of litigation. May this be a topic where alternative dispute resolution may be particularly helpful? In particular the fact that the draftsman may be thought not to have addressed his mind to the issue of the gap, may if used as a justification for filling gaps, subvert the general restrictions on this process, since it could be contended that, in the case of almost all gaps, the draftsman had overlooked the problem. Hence it would seem that great caution would be advisable before engaging in litigation in this field.

(1) Chartbrook Ltd v. Persimmon Homes Ltd [2009] 1 UKHL 38, noted by the author in (2009) XIV Art Antiquity and Law 371.

(2) The Golden Victory [2007] 2 AC 353, noted by the author in (2008) XIII Art Antiquity and Law 323.

(3) Attorney-General of Belize v. Belize Telecom Ltd [2009] UKPC 11.

(4) (1889) 14 P.D. 64. See Treitel Contract 12th edn, para. 6-045, p. 234; Cheshire, Fifoot and Furmston Contract 15th edn, p. 185; Anson Contract 28th edn, p. 146.

(5) Ibid. at pp. 68-70.

(6) Shirlaw v. Southern Foundries Ltd [1939] 2 K.B. 206 at 227.

(7) Para. 38.

(8) Para. 32.

(9) Paras 29-32.

(10) Paras 36-37.

(11) Para. 16.

(12) (1977) 180 C.L.R. 266 at 282-283. See also Hillas v. Arcos (1932) 38 Com. Cas. 23 (term implied followed previous similar contract).

A.H. Hudson, Emeritus Professor of Common Law, University of Liverpool.
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Title Annotation:legal interpretation
Author:Hudson, A.H.
Publication:Art Antiquity & Law
Geographic Code:4EUUK
Date:Jul 1, 2010
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