issued ‘with profits’ life assurance policies, which are a way of saving for retirement. If policy holders took benefits as a taxable annuity, then they got tax exemptions on the premiums. They could choose to have their annuity at a "guaranteed annual rate" that would be fixed, or a "current annuity rate" 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 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. The Equitable's Annual Regulatory Returns, submitted each year to the regulatory authorities had set out this practice since the 1993. The Equitable's Annual Regulatory Returns had been scrutinized each year by the regulatory authorities and nothing adverse had been said by the regulatory authorities about the Equitable's Differential Terminal Bonus Policy. In 1998, because the GAR policyholders received a lower terminal bonus than they expected certain GAR policyholders complained. Mr Hyman was a representative policyholder. At no point, however, were the GAR policyholders ever paid less per annum than their guaranteed fund 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. 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 and private law. 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 almost collapsed after the case, because it was unable to meet its additional liability to GAR policyholders, and had to sell assets and close to new business. It triggered an explosion of litigation and bitter recrimination among policyholders, directors, auditors, regulators and the government.
