Equitable Life Assurance Society v Hyman
Encyclopedia
Equitable Life Assurance Society v Hyman [2000] UKHL 39 is an English contract law
case, concerning implied terms
.
(i.e. with a payment annually), then they got tax exemptions on the premiums (and bonuses at the end of the year). They could choose to have their annuity at a "guaranteed annual rate" ("GAR") that would be fixed, or a "current annuity rate" ("CAR") that would fluctuate according to the market. The choice did not affect the premium. From 1993 the current annuity fell below the guaranteed one. Article 65 of the Equitable Life's Articles of Association
said the directors could, at their discretion, vary bonuses and the company had relied on this since its foundation.
The directors of Equitable Life decided they would reduce the level of terminal bonuses for GAR policyholders, from the higher figure shown on the GAR policyholders' annual bonus notices, to a lower figure (if necessary to zero) so as to equalise the benefits so far as possible i.e. the policy proceeds with the higher terminal bonus times the CAR rate equalled the policy proceeds with lower terminal bonus times the GAR rate. Because the GAR policyholders received a far lower terminal bonus than they expected (they expected the higher terminal bonus and, in addition, the GAR rate) they complained. Mr Hyman was a representative policyholder. At no point, however, were the GAR policyholders ever paid less per annum (and nor was there ever any intention by the directors of Equitable Life to pay them less) than their guaranteed fund (i.e. excluding the non-contractual terminal bonus) times guaranteed annuity rate.
Lord Cooke added that the discretion could be struck down, no matter how broadly it was drafted, in the same way as happens in administrative law (Padfield v Minister of Agriculture) and private law (Howard Smith Ltd v Ampol Ltd
). The result of the discretion would not be consistent with the purpose of the policy.
Lords Slynn, Hoffmann and Hobhouse concurred with both. £1.5b of annuities needed to be paid in full.
English contract law
English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
case, concerning implied terms
Implied terms in English law
Implied terms in English law refers to the practice of setting down default rules for contracts, when terms that contracting parties expressly choose run out, or setting down mandatory rules which operate to override terms that the parties may have themselves chosen...
.
Facts
Equitable Life (est 1762) issued ‘with profits’ life assurance policies, which are a way of saving for retirement. If policy holders took benefits as a taxable annuityAnnuity (European financial arrangements)
An annuity can be defined as a financial contract which provides an income stream in return for an initial payment with specific parameters. It is the opposite of a settlement funding...
(i.e. with a payment annually), then they got tax exemptions on the premiums (and bonuses at the end of the year). They could choose to have their annuity at a "guaranteed annual rate" ("GAR") that would be fixed, or a "current annuity rate" ("CAR") that would fluctuate according to the market. The choice did not affect the premium. From 1993 the current annuity fell below the guaranteed one. Article 65 of the Equitable Life's Articles of Association
Articles of Association
The Continental Association, often known simply as the "Association", was a system created by the First Continental Congress in 1774 for implementing a trade boycott with Great Britain...
said the directors could, at their discretion, vary bonuses and the company had relied on this since its foundation.
The directors of Equitable Life decided they would reduce the level of terminal bonuses for GAR policyholders, from the higher figure shown on the GAR policyholders' annual bonus notices, to a lower figure (if necessary to zero) so as to equalise the benefits so far as possible i.e. the policy proceeds with the higher terminal bonus times the CAR rate equalled the policy proceeds with lower terminal bonus times the GAR rate. Because the GAR policyholders received a far lower terminal bonus than they expected (they expected the higher terminal bonus and, in addition, the GAR rate) they complained. Mr Hyman was a representative policyholder. At no point, however, were the GAR policyholders ever paid less per annum (and nor was there ever any intention by the directors of Equitable Life to pay them less) than their guaranteed fund (i.e. excluding the non-contractual terminal bonus) times guaranteed annuity rate.
Judgment
The House of Lords unanimously agreed that there was an implied term in the Articles of Association such that the directors of Equitable Life could not exercise their discretion in the way they had because it defeated the reasonable expectations of the GAR policyholders as exemplified by Equitable having quoted the higher terminal bonus on each GAR policyholders' annual bonus notice (no other life office had quoted terminal bonus in its annual bonus notices to policyholders as terminal bonus can only be determined at policy maturity because of the volatility of financial markets). Although there was no express term in Equitable Life's constitution that constrained the discretion of the directors, it was necessary to imply such a term to uphold the policyholders' reasonable expectations. Lord Steyn gave the leading judgment.Lord Cooke added that the discretion could be struck down, no matter how broadly it was drafted, in the same way as happens in administrative law (Padfield v Minister of Agriculture) and private law (Howard Smith Ltd v Ampol Ltd
Howard Smith Ltd v Ampol Ltd
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 is a leading UK company law case, concerning the duty of directors to act only for "proper purposes". This duty has been codified into the Companies Act 2006 section 171, and arises particularly in cases involving takeover bids.-Facts:RW Millers...
). The result of the discretion would not be consistent with the purpose of the policy.
Lords Slynn, Hoffmann and Hobhouse concurred with both. £1.5b of annuities needed to be paid in full.
Significance
Equitable Life collapsed after the case, because it was unable to meet its additional liability to GAR policyholders. It triggered an explosion of litigation and bitter recrimination among policyholders, directors, auditors, regulators and the government. It must be said that this judgment is still somewhat controversial in legal circles as Sir John Chadwick (a retired Court of Appeal Judge) said in 2010 "The view is widely held among lawyers experienced in this field that the House of Lords' decision in Hyman was unexpected and did not accord with the principles that should have been applicable in relation to a mutual Society". The difficulty was that there were both pension policies containing "guaranteed annuity rates" (GARs) and pension policies not containing "guaranteed annuity rates" (non-GARs). It seems reasonable to assume that the judgement could have applied equally well to the non-GARs i.e. their reasonable expectations should not be infringed (as actually happened) in order to pay for the (now very expensive) "guaranteed annuity rates" of the GARs. Equitable Life did not have enough money to meet both the reasonable expectations of the GARs and the reasonable expectations of the non-GARs. Thus the judgment remains controversial as, in practice, it resulted in a favouring of the GARs at the expense of the non-GARs. It is even possible that the judges hearing the case in the House of Lords had not been property informed and that if they had been properly informed they would have concluded that the lower terminal bonus, combined with the GAR rate, was within the directors' discretion, provided that the lower terminal bonus rate was never negative (i.e. the minimum lower terminal bonus rate was zero).See also
- Scally v Southern Health and Social Services BoardScally v Southern Health and Social Services BoardScally v Southern Health and Social Services Board [1992] 1 AC 294 is an English contract law case, relevant for pensions and UK labour law, concerning implied terms.-Facts:...
[1992] 1 AC 294 - Crossley v Faithful & Gould Holdings LtdCrossley v Faithful & Gould Holdings LtdCrossley v Faithful & Gould Holdings Ltd [2004] is an English contract law case, concerning implied terms.-Facts:Mr Crossley was a director of Faithful & Gould Ltd. He suffered a nervous breakdown. Under the firm’s disability insurance scheme, so long as he was an employee he was entitled to...
[2004] EWCA Civ 293 - Attorney General of Belize v Belize Telecom LtdAttorney General of Belize v Belize Telecom LtdAttorney General of Belize v Belize Telecom Ltd [2009] is a case on which the Privy Council gave advice, relevant for contract law, company law and constitutional law...
[2009] UKPC 10 - Equitable Life (Payments) Act 2010Equitable Life (Payments) Act 2010The Equitable Life Act 2010 is an Act of the Parliament of the United Kingdom. It gives the HM Treasury the power to compensate more than a million policyholders adversely affected by the collapse of The Equitable Life Assurance Society in 1999.-External links:* – official page on UK Parliament...