''Southern Foundries (1926) Ltd v Shirlaw''

940 Year 940 ( CMXL) was a leap year starting on Wednesday (link will display the full calendar) of the Julian calendar. Events By place Europe * The tribe of the Polans begins the construction of the following fortified settlements (Gi ...

AC 701 is an important

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 ...

and company law case. In the field of contracts it is well known for MacKinnon LJ's decision in the Court of Appeal, where he put forth the " officious bystander" formulation for determining what terms should be implied into agreements by the courts. In the field of company law, it is known primarily to stand for the principle that damages may be sought for breach of contract by a director even though a contract may ''de facto'' constrain the exercise of powers to sack people found in the company's constitution.

Facts

Mr Shirlaw had been the managing director of Southern Foundries Ltd, which was in the business of

iron Iron () is a chemical element with symbol Fe (from la, ferrum) and atomic number 26. It is a metal that belongs to the first transition series and group 8 of the periodic table. It is, by mass, the most common element on Earth, right in ...

castings In metalworking Metalworking is the process of shaping and reshaping metals to create useful objects, parts, assemblies, and large scale structures. As a term it covers a wide and diverse range of processes, skills, and tools for producing ob ...

. But then another company called ‘Federated Foundries Ltd’ took over the business. The new owners had altered article 8 of Southern Foundries Ltd's constitution, empowering two directors and the secretary (who were friends of Federated Foundries) to remove any director. Then they acted on it, by sacking Mr Shirlaw. Mr Shirlaw's contract, signed in 1933 stated that he was to remain in post for ten years. Mr Shirlaw sued the company for

breach of contract Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other part ...

, claiming for an

injunction An injunction is a legal and equitable remedy in the form of a special court order that compels a party to do or refrain from specific acts. ("The court of appeals ... has exclusive jurisdiction to enjoin, set aside, suspend (in whole or in p ...

to stay in office or substantial

damages At common law, damages are a remedy in the form of a monetary award to be paid to a claimant as compensation for loss or injury. To warrant the award, the claimant must show that a breach of duty has caused foreseeable loss. To be recognised at ...

Judgment

Humphrey's J in the High Court awarded £12,000 to Mr Shirlaw for breach of contract.

Court of Appeal

The Court of Appeal held ( Sir Wilfrid Greene MR dissenting on this point) that it was an implied term in the 21 December 1933 agreement that the company would not remove Mr Shirlaw from his directorship for the time in which he was appointed as managing director. Furthermore, it was held that it was an implied term that the company would not alter its articles to create a right of removal and there was no case for reducing the damages awarded by the High Court. At the end of his judgment MacKinnon LJ read out this famous passage. Goddard LJ concurred with MacKinnon LJ

House of Lords

Viscount Maugham, Lord Atkin, Lord Wright, Lord Romer and Lord Porter upheld the decision of the Court of Appeal. The House of Lords held it was wrong to act on the change in the articles, that this was a breach of contract, and upheld the £12,000 damages award. Lord Atkin gave a succinct first judgment. Lord Wright, concurring, stated that it was a breach of contract if a director was removed without cause.722

References

{{Reflist United Kingdom company case law English contract case law House of Lords cases 1940 in British law 1940 in case law

Facts

Judgment

Court of Appeal

House of Lords

See also

References