''Erlanger v New Sombrero Phosphate Co'' (1878) 3 App Cas 1218 is a landmark

English contract law English contract law is the body of law that regulates legally binding agreements 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 ...

restitution The law of restitution is the law of gains-based recovery, in which a court orders the defendant to ''give up'' their gains to the claimant. It should be contrasted with the law of compensation, the law of loss-based recovery, in which a court o ...

and

UK company law The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal ...

case. It concerned rescission for misrepresentation and how the impossibility of counter restitution may be a bar to rescission. It is also an important illustration of how promoters of a company stand in a

fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...

relationship to subscribers.

Facts

Frédéric Émile d'Erlanger Frédéric Émile, Baron d'Erlanger (June 19, 1832 in Frankfurt am Main – May 22, 1911 in Versailles), born as Friedrich Emil Erlanger, was a German-French banker and Consul. He founded the French branch of the Erlanger banking businesses, Emi ...

was a Parisian banker. He bought the lease of the

Anguilla Anguilla ( ) is a British Overseas Territory in the Caribbean. It is one of the most northerly of the Leeward Islands in the Lesser Antilles, lying east of Puerto Rico and the Virgin Islands and directly north of Saint Martin. The territo ...

island of

Sombrero A sombrero (Spanish , ) is a type of wide-brimmed Mexican men's hat used to shield the face and eyes from the sun. It usually has a high pointed crown, an extra-wide brim (broad enough to cast a shadow over the head, neck and shoulders of the we ...

for

phosphate In chemistry, a phosphate is an anion, salt, functional group or ester derived from a phosphoric acid. It most commonly means orthophosphate, a derivative of orthophosphoric acid . The phosphate or orthophosphate ion is derived from phospho ...

mining for £55,000. He then set up the New Sombrero Phosphate Co. Eight days after incorporation, he sold the island to the company for £110,000 through a

nominee A candidate, or nominee, is the prospective recipient of an award or honor, or a person seeking or being considered for some kind of position; for example: * to be elected to an office — in this case a candidate selection procedure occurs. * t ...

. One of the directors was the

Lord Mayor of London The Lord Mayor of London is the mayor of the City of London and the leader of the City of London Corporation. Within the City, the Lord Mayor is accorded precedence over all individuals except the sovereign and retains various traditional powe ...

, who himself was independent of the syndicate that formed the company. Two other directors were abroad, and the others were mere puppet directors of Erlanger. The board, which was effectively Erlanger, ratified the sale of the lease. Erlanger, through promotion and advertising, got many members of the public to invest in the company. After eight months, the public investors found out the fact that Erlanger (and his syndicate) had bought the island at half the price the company (now with their money) had paid for it. The New Sombrero Phosphate Co sued for rescission based on non-disclosure, if they gave back the mine and an account of profits, or for the difference.

Judgment

The House of Lords unanimously held that promoters of a company stand in a fiduciary relationship to investors, meaning they have a duty of disclosure. Further, they held, by majority (

Lord Cairns LC Hugh McCalmont Cairns, 1st Earl Cairns (27 December 1819 – 2 April 1885), was an Irish-born British statesman who served as Lord High Chancellor of Great Britain during the first two ministries of Benjamin Disraeli. He was one of the most ...

dissenting), that the contract could be rescinded, and that rescission was not barred by laches. Lord Blackburn decided that delay did not bar rescission. As a general "condition to a rescission there must be a ''

restitutio in integrum ''Restitutio ad integrum'', or ''restitutio in integrum'', is a Latin term that means "restoration to original condition". It is one of the primary guiding principles behind the awarding of damages in common law negligence claims. In European pate ...

''." There was a question over this, since phosphate had been mined, and it was not so easy to put the phosphate back. He observed it would "be obviously unjust that a person who has been in possession of property under the contract which he seeks to repudiate should be allowed to throw that back on the other party’s hands without accounting for any benefit he may have derived from the use of the property… rmaking compensation for that deterioration." In this case, however, adequate compensate could be paid. So there was no impossibility in counter restitution. His judgment ran as follows.(1877-78) LR 3 App Cas 1218, 1269-1283 Lord Penzance,

Lord Hatherley William Page Wood, 1st Baron Hatherley, PC (29 November 1801 – 10 July 1881) was a British lawyer and statesman who served as a Liberal Lord High Chancellor of Great Britain between 1868 and 1872 in William Ewart Gladstone's first ministry. ...

, Lord O'Hagan, Lord Selborne and Lord Gordon concurred.

Notes

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References

* A Burrows, J Edelman and E McKendrick, ''Cases and Materials on the Law of Restitution'' (2nd Ed, OUP, Oxford, 2007) English unjust enrichment case law English misrepresentation case law 1878 in case law Lord Blackburn cases 1878 in British law United Kingdom company case law House of Lords cases

Facts

Judgment

See also

Notes

References