Ecom Limited, a Belizean company, appealed to the Privy Council about the construction of the articles of association of the former major telecommunications provider in Belize, Belize Telecommunications Limited (BTL).

The articles provided that, if a person held both a golden share plus a certain number of ordinary shares in BTL, then that person could appoint or remove two directors. The articles were silent as to what happened to the two directors if, as happened in this case, the golden shareholder ceased to hold the requisite ordinary shares.

The Privy Council agreed with Ecom Limited that a term needed to be implied to avoid defeating what appeared to have been the overriding purpose of the machinery of appointment and removal of directors in the articles. In addition, and obiter, the Privy Council:

The Privy Council was concerned that the previous formulations of the test for implying a term should not be allowed to take on an independent life of their own and lead the court away from an objective test. For example, the formulation that the term must "go without saying" might lead to subjective considerations wrongly creeping into the test: that is, how the actual parties would view the proposed implied term. Or the formulation "necessary to give business efficacy" might lead to the court looking at what works perfectly well for the parties rather than what the reasonable person would have understood the contract to mean.

The restatement of the test has reinforced the objective approach and means that parties need only consider one test, rather than attempt to tackle several at the same time, providing greater certainty.

Of course, litigation over the existence or otherwise of an implied term in a contract is never certain and is fact-specific. By far the best way to ensure contractual certainty is, when drafting the contract, to consider carefully as many potential events as possible and deal with them expressly in the contract.

However, if an unexpected situation arises and the parties to the contract disagree on what the consequences of that situation should be, then the answer lies in what the reasonable man would have understood the contract to say the consequences should be.

The judgment also has potentially important ramifications for the interpretation of articles of association. Articles have been interpreted differently from other contractual instruments because they represent a contract between shareholders who, unlike parties to other contracts, do not negotiate and agree terms before entering into a contract. Rather, they commit to the terms of the articles as they appear in the public registry. For that reason, there was previously some uncertainty as to the extent to which, if at all, the court could look outside the four corners of the articles to interpret them.

This judgment, however, says that one can use extrinsic facts to construe the articles, but that admissible background information must be limited to what any reader would reasonably be supposed to know. Previous case law suggesting that no reference could be made to the facts was distinguished on the basis that it related to facts known only to some of those involved in the formation of the company. Facts of that sort, the Privy Council reiterated, cannot be taken into account.

In practice, therefore, extrinsic facts that the court might take into account will be limited only to those obvious to everyone. For example, in this case, the extrinsic fact considered was one that would have been obvious to everyone in Belize, and in particular to every shareholder or potential shareholder in BTL: that telecoms in Belize had been a state monopoly and that BTL was part of a scheme of privatisation.