Commercial

Insurance - retirement with profits policies containing guaranteed annuity rate - directors not entitled to award different rates of final bonus awarded depending on whether guaranteed or current rate of annuity taken by policyholderEquitable Life Assurance Society v Hyman: HL (Lord Slynn of Hadley, Lord Steyn, Lord Hoffmann, Lord Cooke of Thorndon and Lord Hobhouse of Woodborough): 20 July 2000

The directors of a life assurance society applied to the court for declarations that they had been entitled to adopt a policy of calculating final bonuses for with-profits policyholders whose policy contained provision for a guaranteed annuity rate in such a way as to allocate a smaller bonus to those who elected to take an annuity at the guaranteed rate than to those who chose an alternative benefit calculated at the lower current annuity rate, thus equalising the annuity obtained by the policyholder regardless of the rate applicable to it.

The judge granted the declarations.

The Court of Appeal (see [2000] Gazette, 3 February); [2000] 2 WLR 798 reversed his decision.

The directors appealed.Elizabeth Gloster QC, Brian Green QC, Andrew Lenon and James Ayliffe (instructed by Denton Wilde Sapte) for the society.

Jonathan Sumption QC, Sarah Asplin and Simon Salzedo (instructed by Norton Rose) for the defendant.Held, dismissing the appeal, that, although the society's articles of association contained no express restriction precluding the directors from calculating the final bonus in a way which was inconsistent with the terms of the guaranteed annuity rate policies, the self-evident commercial objective of the inclusion of guaranteed rates had been to protect the policyholder against a fall in market annuity rates; that the reasonable expectation of the parties must have been that the directors would not exercise their discretion in conflict with that objective; that, consequently, to give effect to the reasonable expectations of the parties it was essential to imply into the articles of association a restriction precluding the directors from resolving upon a policy designed to deprive the guaranteed rates of any substantial value; and that, accordingly, the directors had not been entitled to award differential bonuses which eliminated the benefit of the guaranteed annuity rates.

(WLR)