Hadley v. Baxendale – Case Brief SummarySummary of Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854).FactsA shaft in Hadley’s (P) mill broke rendering the mill inoperable. Hadley hired Baxendale (D) to transport the broken mill shaft to an engineer in Greenwich so that he could make a duplicate. Hadley told Baxendale that the shaft must be sent immediately and Baxendale promised to deliver it the next day. Baxendale did not know that the mill would be inoperable until the new shaft arrived.Baxendale was negligent and did not transport the shaft as promised, causing the mill to remain shut down for an additional five days. Hadley had paid 2 pounds four shillings to ship the shaft and sued for 300 pounds in damages due to lost profits and wages. The jury awarded Hadley 25 pounds beyond the amount already paid to the court and Baxendale appealed.Issue What is the amount of damages to which an injured party is entitled for breach

of contract?Holding and Rule An injured party may recover those damages reasonably considered to arise

naturally from a breach of contract, or those damages within the reasonable contemplation of the parties at the time of contracting.

The court held that the usual rule was that the claimant is entitled to the amount he or she would have received if the breaching party had performed; i.e. the plaintiff is placed in the same position she would have been in had the breaching party performed. Under this rule, Hadley would have been entitled to recover lost profits from the five extra days the mill was inoperable.The court held that in this case however the rule should be that the damages were those fairly and reasonably considered to have arisen naturally from the breach itself, or such as may be reasonably supposed to have been in the contemplation of both parties at the time the contract was made.The court held that if there were special circumstances under which the contract had been made, and these circumstances were known to both parties at the time they made the contract, then any breach of the contract would result in damages that would naturally flow from those special circumstances.Damages for special circumstances are assessed against a party only when they were reasonably within the contemplation of both parties as a probable consequence of a breach. The court held that in this case Baxendale did not know that the mill was shut down and would remain closed until the new shaft arrived. Loss of profits could not fairly or reasonably have been contemplated by both parties in case of a breach of this contract without Hadley having communicated the special circumstances to Baxendale. The court ruled that the jury should not have taken the loss of profits into consideration.DispositionVacated and remanded for new trial.NotesConsequential damages are linked to knowledge and foreseeability at the time of contracting and deal with the recovery of damages for loss other than those arising naturally. Modern courts do not look at the implied tacit agreement discussed in this

case, and instead use foreseeability as the cornerstone to determine consequential damages. The object of damages as a remedy in a contract is to make the parties finish in a position they would have been in had the contract been properly performed. What is reasonably foreseeable at the time of contracting requires evidence of the circumstances under which the parties entered into the contract and the knowledge that they possess. Such knowledge can be imputed to the parties from customary trade practice and other sources.See Peevyhouse v. Garland Coal & Mining Co. for a law school contracts case brief in which the court held that diminution in value is the proper remedy for breach of contract where breach pertains only to an incidental matter and performance would be disproportionately costly.

Ashbury Railway Carriage & Iron Co. v. Riche , decided in the House of Lords in 1875 (Law Rep. 7 H. L. 653)

In this case the objects set out in the company's memorandum were "to make and sell, or lend on hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery and rolling stock; to carry on the business of mechanical engineers and general contractors; to purchase, lease, work and sell mines, minerals, land and buildings; to purchase and sell as merchants, timber, coal, metals, or other materials, and to buy any such materials on commission or as agents."

The directors purchased a concession for making a railway in Belgium and contracted with Riche to construct the line.

Was here a valid contract?

The construction of a railway, as distinct from rolling stock, was ultra vires. Therefore Riche's action for breach of the alleged contract failed as it was void.

This would have been the case even if every shareholder of the company had given approval - it was an act which the company had no lawful power to do.

The law has since changed through Section 108 of the Companies Act 1989, substituting a new section 35 of the Companies Act 1985. Under that new section it remains the duty of the directors to observe any limitations on their powers flowing

from the company's memorandum (section 35(3)) and a member of a company may bring proceedings to restrain the doing of an act in excess of those powers (section 35(2)); but, by section 35(1): "The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's memorandum."

Thus by applying the modern law to the Ashbury case, the directors committed a breach of duty by making the contract and might have been restrained by action by a member; but once the contract was made its validity could not be questioned provided that the making of the contract was "an act done by the company."

Yet it might be objected that it was not such an act because the directors had no power to make the contract. This objection is met by section 35A(1):

"In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company's constitution."

Read more: http://wiki.answers.com/Q/What_were_the_facts_of_the_case_of_Ashbury_Railway_Carriage_v_Riche#ixzz1ER2cvMbh

Salomon v A Salomon & Co LtdFrom Wikipedia, the free encyclopedia

Salomon v A Salomon & Co Ltd

Court House of Lords

Citation(s) [1897] AC 22

Case history

Prior action(s) Broderip v Salomon [1895] 2 Ch 323

Case opinions

Lord Macnaghten, Lord Halsbury and Lord Herschell

Keywords

Corporation, separate legal personality, agency

Salomon v A Salomon & Co Ltd [1897] AC 22 is a landmark UK company law case. The effect of the Lords' unanimous ruling was to firmly uphold

the doctrine of corporate personality, as set out in the Companies Act 1862.

Contents [hide]

1 Facts

2 Judgment

o 2.1 High Court

o 2.2 Court of Appeal

o 2.3 House of Lords

3 Significance

4 See also

5 Notes

6 References

Facts

Mr Aron Salomon was a leather boot and shoe manufacturer. His firm was in Whitechapel High Street, with warehouses and a large establishment. He had had it for 30 years and "he might fairly have counted upon retiring with at least £10,000 in his pocket." He had a wife, a daughter and five sons. Four of the sons worked with him. The sons wanted to be partners, so he turned the business into a limited company. The wife and five eldest children became subscribers and two eldest sons also directors. Mr Salomon took 20,001 of the company's 20,007 shares.

The price fixed by the contract was £39,000, which was "extravagent" and not "anything that can be called a business like or reasonable estimate of value." Transfer of the business happened on June 1, 1892. Purchase money for the business was paid, totalling £20,000, to Mr Salomon. £10,000 was paid indebentures to Mr Salomon as well (ie, Salomon gave the company a loan, secured by a charge over the assets of the company). The balance paid went to extinguish the business’ debts (£1000 of which was cash to Salomon).But soon after Mr Salomon incorporated his business, there was economic trouble. A series of strikes in the shoe industry led the government, Salomon's main customer, to split its contracts between more firms (the Government wanted to diversify its supply base to avoid the risk of its few suppliers being crippled by strikes). His warehouse was full of unsold stock. He and his wife lent the company money. He cancelled his debentures. But the company needed more money, and they sought £5000 from a Mr Edmund Broderip. They gave him a debenture, the loan with 10% interest and secured by a floating charge. But the business still failed, and they could not keep up with the interest payments. In October 1893 Mr Broderip sued to enforce his security. That was the end. The company was put into liquidation. Mr Broderip was paid but other unsecured creditors were not.The liquidator met Broderip’s claim with a counter claim, joining Salomon as a defendant, that the debentures were invalid for being issued as fraud. The liquidator claimed all the money back that was transferred when the company was started: rescission of the agreement for the business transfer itself, cancellation of the debentures and repayment of the balance of the purchase money.Judgment

High CourtIn the first case, Broderip v Salomon [1893] B 4793, Vaughan Williams J said Mr Broderip’s claim was valid. It was undisputed that the 20,000 shares were fully paid up. He said the company had a right of indemnity against Mr Salomon. He said the signatories of the memorandum were mere dummies, the company was just Mr Salomon in another form, an alias, his agent. Therefore it was entitled to indemnity from the principal. The liquidator amended the counter claim, and an award was made for indemnity.Court of Appeal

Lindley LJ was the leading expert on partnerships and company law.The Court of Appeal [1895] 2 Ch 323 confirmed Vaughan Williams J's decision against Mr Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability, which Parliament had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". Lindley LJ (an expert on partnership law) held that the company was a trustee for Mr Salomon, and as such was bound to indemnify the company's debts. Lopes LJ and Kay LJ variously described the company as a myth and a fiction and said that the incorporation of the business by Mr Salomon had been a mere scheme to enable him to carry on as before but with limited liability.House of Lords

Lord Halsbury was a conservative peer, who supported a (now defunct[1]) strict literalist approach to legislative interpretation. He was the original editor of Halsbury's Laws.The House of Lords unanimously overturned this decision, rejecting the arguments from agency and fraud. They held that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. Lord Halsbury LC stated that the statute "enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others."Lord Halsbury remarked that - even if he were to accept the proposition that judges were at liberty to insert words to manifest the intention they wished to impute to the Legislature - he was unable to discover what affirmative proposition the Court of Appeal's logic suggested. He considered that identifying such an affirmative proposition represented an "insuperable difficulty" for anyone putting forward the argument propounded by the Lords Justices of Appeal.Lord Herschell noted the potentially "far reaching" implications of the Court of Appeal's logic and that in recent years many companies had been set up in which one or more of the seven shareholders were "disinterested persons" who did not wield any influence over the management of the company. Anyone dealing with

such a company was aware of its nature as such, and could by consulting the register of shareholders become aware of the breakdown of share ownership among the shareholders.Lord Macnaghten asked what was wrong with Mr. Salomon taking advantage of the provisions set out in the statute, as he was perfectly legitimately entitled to do. It was not the function of judges to read limitations into a statute on the basis of their own personal view that, if the laws of the land allowed such a thing, they were "in a most lamentable state", as Malins V-C had stated in an earlier case in point, In Re Baglan Hall Colliery Co., which had likewise been overturned by the House of Lords.The House held:"Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not."The House further noted:"The company is at law a different person altogether from the subscribers to the Memorandum, and though it may be that after incorporation of the business is precisely the same as it was before and the same persons and managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustees for them. Nor are the subscribers or members liable in any shape or form except to the extent and in the manner provided by the act."On the issue of floating charges, Lord Macnaghten also said this.“For such a catastrophe as has occurred in this case some would blame the law that allows the creation of a floating charge. But a floating charge is too convenient a form of security to be lightly abolished. I have long thought, and I believe some of your Lordships also think, that the ordinary trade creditors of a trading company ought to have a preferential claim on the assets in liquidation in respect of debts incurred within a certain limited time before the winding-up. But that is not the law at present. Everybody knows that when there is a winding-up debenture holders generally step in and sweep off everything; and a great scandal it is.”Significance

In the decades since Salomon's case, various exceptional circumstances have been delineated, both by legislatures and the judiciary, in England and elsewhere (including Ireland) when courts can legitimately disregard a company's separate legal personality, such as where crime or fraud has been committed.Although Salomon's case is cited in court to this day, it has met with some criticism. For example, Kahn-Freund called the decision "calamitous" in his article published at

[1944] 7 MLR 54. In that article, the author also called for the abolition of private companies.There is therefore much debate as to whether the same decision would be reached if the same facts were considered in the modern legal environment.

Foss v HarbottleFrom Wikipedia, the free encyclopedia

Foss v Harbottle

Citation(s) (1843) 67 ER 189, (1843) 2 Hare 461

Case opinions

Wigram VC

Keywords

Derivative action, separate legal personality

Foss v Harbottle (1843) 67 ER 189 is a leading English precedent in corporate law. In any

action in which a wrong is alleged to have been done to a company, the proper claimant is

the company itself. This is known as "the rule in Foss v Harbottle", and the several important

exceptions that have been developed are often described as "exceptions to the rule in Foss v

Harbottle". Amongst these is the 'derivative action', which allows a minority shareholder to

bring a claim on behalf of the company. This applies in situations of 'wrongdoer control' and

is, in reality, the only true exception to the rule. The rule in Foss v Harbottle is best seen as

the starting point for minority shareholder remedies.Contents [hide]

1 Facts

2 Judgment

3 Developments

4 Exceptions to the rule

5 See also

6 Notes

[edit]Facts

Richard Foss and Edward Starkie Turton were two minority shareholders in the "Victoria

Park Company". The company had been set up in September 1835 to buy 180 acres (0.73

km2) of land near Manchester and, according to the report,

"enclosing and planting the same in an ornamental and park-like manner, and erecting

houses thereon with attached gardens and pleasure-grounds, and selling, letting or

otherwise disposing thereof".

This became Victoria Park, Manchester. Subsequently, an Act of Parliament incorporated the

company.[1] The claimants alleged that property of the company had been misapplied and

wasted and various mortgages were given improperly over the company's property. They

asked that the guilty parties be held accountable to the company and that a receiver be

appointed.

The defendants were the five company directors (Thomas Harbottle, Joseph Adshead, Henry

Byrom, John Westhead, Richard Bealey) and the solicitors and architect (Joseph Denison,

Thomas Bunting and Richard Lane); and also H Rotton, E Lloyd, T Peet, J Biggs and S Brooks,

the several assignees of Byrom, Adshead and Westhead, who had become bankrupts.

[edit]Judgment

The court dismissed the claim and held that when a company is wronged by its directors it is

only the company that has standing to sue. In effect the court established two rules. Firstly,

the "proper plaintiff rule" is that a wrong done to the company may be vindicated by the

company alone. Secondly, the "majority rule principle" states that if the alleged wrong can

be confirmed or ratified by a simple majority of members in a general meeting, then the

court will not interfere,cadit quaestio.

“ The Victoria Park Company is an incorporated body, and the conduct with which the Defendants are charged in this suit is an injury not to the Plaintiffs exclusively; it is an injury to the whole corporation by individuals whom the corporation entrusted with powers to be exercised only for the good of the corporation. And from the case of The Attorney-General v Wilson (1840) Cr & Ph 1 (without going further) it may be stated as undoubted law that a bill or information by a corporation will lie to be relieved in respect of injuries which the corporation has suffered at the hands of persons standing in the situation of the directors upon this record. This bill, however, differs from that in The Attorney-General v Wilson in this—that, instead of the corporation being formally represented as Plaintiffs, the bill in this case is brought by two individual corporators, professedly on behalf of themselves and all the other members of the corporation, except those who committed the injuries complained of—the Plaintiffs assuming to themselves the right and power in that manner to sue on behalf of and represent the corporation itself.It was not, nor could it successfully be, argued that it was a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation. In law the corporation and the aggregate members of the corporation are not the same thing for purposes like this; and the only question can be whether the facts alleged in this case justify a departure from the rule which, primâ facie , would require that the corporation should sue in its own name and in its corporate character, or in the name of someone whom the law has appointed to be its representative...The first objection taken in the argument for the Defendants was that the individual members of the corporation cannot in any case sue in the form in which this bill is framed. During the argument I intimated an opinion, to which, upon further consideration, I fully adhere, that the rule was much too broadly stated on the part of the Defendants. I think there are cases in which a suit might properly be so framed. Corporations like this, of a private nature, are in truth little more than private partnerships; and in cases which may easily be suggested it would be too much to hold that a society of private persons associated together in undertakings, which, though certainly beneficial to the public, are nevertheless matters of private property, are to be deprived of their civil rights, inter se , because, in order to make their common objects more attainable, the Crown or the Legislature may have conferred upon them the benefit of a corporate

”

character. If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that the principle so forcibly laid down by Lord Cottenham in Wallworth v Holt (4 Myl & Cr 635; see also 17 Ves 320, per Lord Eldon) and other cases would apply, and the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue.But, on the other hand, it must not be without reasons of a very urgent character that established rules of law and practice are to be departed from, rules which, though in a sense technical, are founded on general principles of justice and convenience; and the question is whether a case is stated in this bill entitling the Plaintiffs to sue in their private characters...Now, that my opinion upon this case may be clearly understood, I will consider separately the two principal grounds of complaint to which I have adverted, with reference to a very marked distinction between them. The first ground of complaint is one which, though it might primâ facie entitle the corporation to rescind the transactions complained of, does not absolutely and of necessity fall under the description of a void transaction. The corporation might elect to adopt those transactions, and hold the directors bound by them. In other words, the transactions admit of confirmation at the option of the corporation. The second ground of complaint may stand in a different position; I allude to the mortgaging in a manner not authorized by the powers of the Act. This, being beyond the powers of the corporation, may admit of no confirmation whilst any one dissenting voice is raised against it. This distinction is found in the case of Preston v The Grand Collier Dock Company (1840) 11 Sim 327, SC; 2 Railway Cases 335.On the first point it is only necessary to refer to the clauses of the Act to shew that, whilst the supreme governing body, the proprietors at a special general meeting assembled, retain the power of exercising the functions conferred upon them by the Act of Incorporation, it cannot be competent to individual corporators to sue in the manner proposed by the Plaintiffs on the present record. This in effect purports to be a suit by cestui que trusts complaining of a fraud committed or alleged to have been committed by persons in a fiduciary character. The complaint is that those

trustees have sold lands to themselves, ostensibly for the benefit of the cestui que trusts. The proposition I have advanced is that, although the Act should prove to be voidable, the cestui que trusts may elect to confirm it. Now, who are the cestui que trusts in this case? The corporation, in a sense, is undoubtedly the cestui que trust; but the majority of the proprietors at a special general meeting assembled, independently of any general rules of law upon the subject, by the very terms of the incorporation in the present case, has power to bind the whole body, and every individual corporator must be taken to have come into the corporation upon the terms of being liable to be so bound. How then can this Court act in a suit constituted as this is, if it is to be assumed, for the purposes of the argument, that the powers of the body of the proprietors are still in existence, and may lawfully be exercised for a purpose like that I have suggested? Whilst the Court may be declaring the acts complained of to be void at the suit of the present Plaintiffs, who in fact may be the only proprietors who disapprove of them, the governing body of proprietors may defeat the decree by lawfully resolving upon the confirmation of the very acts which are the subject of the suit. The very fact that the governing body of proprietors assembled at the special general meeting may so bind even a reluctant minority is decisive to shew that the frame of this suit cannot be sustained whilst that body retains its functions......The second point which relates to the charges and incumbrances alleged to have been illegally made on the property of the company is open to the reasoning which I have applied to the first point, upon the question whether, in the present case, individual members are at liberty to complain in the form adopted by this bill; for why should this anomalous form of suit be resorted to, if the powers of the corporation may be called into exercise? But this part of the case is of greater difficulty upon the merits. I follow, with entire assent, the opinion expressed by the Vice-Chancellor in Preston v The Grand Collier Dock Company, that if a transaction be void, and not merely voidable, the corporation cannot confirm it, so as to bind a dissenting minority of its members. But that will not dispose of this question. The case made with regard to these mortgages or incumbrances is, that they were executed in violation of the provisions of the Act. The mortgagees are not Defendants to the bill, nor does the bill seek to avoid the security itself, if it could be avoided, on which I give no opinion. The bill prays inquiries with a view to proceedings being taken aliunde to set aside

these transactions against the mortgagees. The object of this bill against the Defendants is to make them individually and personally responsible to the extent of the injury alleged to have been received by the corporation from the making of the mortgages. Whatever the case might be, if the object of the suit was to rescind these transactions, and the allegations in the bill shewed that justice could not be done to the shareholders without allowing two to sue on behalf of themselves and others, very different considerations arise in a case like the present, in which the consequences only of the alleged illegal Acts are sought to be visited personally upon the directors. The money forming the consideration for the mortgages was received, and was expended in, or partly in, the transactions which are the subject of the first ground of complaint. Upon this, one question appears to me to be, whether the company could confirm the former transactions, take the benefit of the money that has been raised, and yet, as against the directors personally, complain of the acts which they have done, by means whereof the company obtains that benefit which I suppose to have been admitted and adopted by such confirmation. I think it would not be open to the company to do this; and my opinion already expressed on the first point is that the transactions which constitute the first ground of complaint may possibly be beneficial to the company, and may be so regarded by the proprietors, and admit of confirmation. I am of opinion that this question—the question of confirmation or avoidance—cannot properly be litigated upon this record, regard being had to the existing state and powers of the corporation, and that therefore that part of the bill which seeks to visit the directors personally with the consequences of the impeached mortgages and charges, the benefit of which the company enjoys, is in the same predicament as that which relates to the other subjects of complaint. Both questions stand on the same ground, and, for the reasons which I stated in considering the former point, these demurrers must be allowed.

[edit]Developments

The rule was later extended to cover cases where what is complained of is some internal

irregularity in the operation of the company. However, the internal irregularity must be

capable of being confirmed/sanctioned by the majority.

The rule in Foss v Harbottle has another important implication. A shareholder cannot

generally bring a claim to recover any reflective loss - a diminution in the value of his or her

shares in circumstances where the diminution arises because the company has suffered an

actionable loss. The proper course is for the company to bring the action and recoup the loss

with the consequence that the value of the shares will be restored.

Because Foss v Harbottle leaves the minority in an unprotected position, exceptions have

arisen and statutory provisions have come into being which provide some protection for the

minority. By far and away the most important protection is the unfair prejudice action in ss.

994-6 of the Companies Act 2006 (UK) (s 232Corporations Act 2001 in Australia). Also, there

is a new statutory derivate action available under ss 260-269 of the 2006 Act (and s

236 Corporations Act 2001in Australia).

[edit]Exceptions to the rule

There are certain exceptions to the rule in Foss v. Harbottle, where litigation will be allowed.

The following exceptions protect basic minority rights, which are necessary to protect

regardless of the majority's vote.

1. Ultra vires and illegality

The directors of a company, or a shareholding majority may not use their control of the

company to paper over actions which would be ultra vires the company, or illegal.

s 39 Companies Act 2006 for the rules on corporate capacity

Smith v Croft (No 2) and Cockburn v. Newbridge Sanitary Steam Laundry Co. [1915] 1 IR

237, 252-59 (per O'Brien LC and Holmes LJ) for the illegality point

2. Actions requiring a special majority

If some special voting procedure would be necessary under the company's constitution or

under the Companies Act, it would defeat both if that could be sidestepped by ordinary

resolutions of a simple majority, and no redress for aggrieved minorities to be allowed.

Edwards v Halliwell [1950] 2 All ER 1064

3. Invasion of individual rights

Pender v Lushington (1877) 6 Ch D 70, per Jessel MR

...and see again, Edwards v Halliwell [1950] 2 All ER 1064

4. "Frauds on the minority"

Atwool v Merryweather (1867) LR 5 EQ 464n, per Page Wood VC

Gambotto v WCP Limited (1995) 182 CLR 432 (Aus)

...and see Greenhalgh v Arderne Cinemas Ltd for an example of what was not a fraud on the

minority

[edit]

Foss V Harbottle (1843) 2 Hare 461 - The Rule In Foss V HarbottleThis case is of course the one that lead to the famous rule, now know as "The Rule In Ross v Harbottle". Two minority

shareholders initiated legal proceedings against, among others, the directors of the company. The claimants asked the

court to order the defendants to compensate for losses to the company as a result of alleged fraudulent activity.

Wigram VC held that since the company’s board of directors was still in existence, and since it was still possible to call a

general meeting of the company, there was nothing to prevent the company from obtaining redress in its corporate

character and thus the action by the claimants could not be sustained: "The corporation should sue in its own name and

in its corporate character, or in the name of someone whom the law has appointed to be its representative."

However, the best known and perhaps the clearest statement of the rule in Foss v Harbottle was actually set out by

Jenkins LJ in the case of Edwards v Halliwell:

"The rule in Foss v Harbottle, as I understand it, comes to no more than this. First, the proper plaintiff in an action in

respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the

association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the

company or association and on all its members by a simple majority of the members, no individual member of the

company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the

members of the company or association is in favour of what has been done, then cadit quaestio.". The rule established

that where the company suffers harm, the company itself is the true and proper claimant. Therefore the shareholders

cannot generally sue for wrongs done to the company.

There are however several exceptions to the rule in Foss v Harbottle that have given rise to a number of exceptions

which include - the act complained of is illegal or 'ultra vires'; the requirement of a special majority; personal rights; and

a fraud on the minority.

This study area has been created by our experts to help students with Administrative Law Essay and Problem Questions.

If you require further help with your question, why not order a fully customised model answer on which to base your

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Rylands v. Fletcher – Case BriefRylands v. Fletcher, House of Lords, L.R. 3 H.L. 330 (1868).Case SummaryFacts: See Fletcher v. RylandsIssue 1: Is an absolute duty imposed on a landowner who lawfully brings something onto his land which, while harmless while it remains there, will naturally cause damage if it escapes?Issue 2: Will a party be liable for damage caused by a thing or activity that is unduly dangerous and inappropriate in a certain place, in light of the character of the place and its surroundings?Holding and Rule 1: Yes.The law casts an absolute duty on a person who lawfully brings on his land something which though harmless while it remains there will naturally cause damage if it escapes. Ds are prima facie answerable for all the damage which is the natural consequence of its escape. The plaintiff does not have to show negligence. The defendant however can use as a defense a showing that the escape was P’s fault or that it was caused by a major act of God.Holding and Rule 2: Yes.Where the owner of land, without willfulness or negligence, uses his land in the ordinary manner of its use, though mischief should thereby be occasioned to his neighbor, he will not be liable in damages. But if he brings upon his land any thing which would not naturally come upon it, and which is in itself dangerous, and may become mischievous if not kept under proper control, though in so doing he may act without personal willfulness or negligence, he will be liable in damages for any mischief thereby occasioned.

Disposition: Reversed, judgment for P.Notes: This result here is frequently referred to as the “escaping substances doctrine”. This case is the foundation of the concept of strict liability or absolute liability.

Royal British Bank v TurquandFrom Wikipedia, the free encyclopedia

Royal British Bank v Turquand

Court Court of Exchequer

Judge(s) sitting Lord Jervis CJ

Keywords

Indoor management rule

Royal British Bank v Turquand (1856) 6 E&B 327 is a UK company law case that held people

transacting with companies are entitled to assume that internal company rules are complied

with, even if they are not. This "indoor management rule" or the "Rule in Turquand's Case" is

applicable in most of the common law world. It originally mitigated the harshness of

the constructive notice doctrine, and in the UK it is now supplemented by the Companies

Act 2006 sections 39-41.Contents [hide]

1 Facts

2 Judgment

3 Significance

4 See also

5 Notes

[edit]Facts

Mr Turquand was the official manager (liquidator) of the insolvent ‘Cameron’s Coalbrook

Steam, Coal, and Swansea and London Railway Company’. It was incorporated under

the Joint Stock Companies Act 1844. The company had given a bond for £2000 to the Royal

British Bank, which secured the company’s drawings on its current account. The bond was

under the company’s seal, signed by two directors and the secretary. When the company

was sued, it alleged that under its registered deed of settlement (the articles of association),

directors only had power to borrow what had been authorised by a company resolution. A

resolution had been passed but not specifying how much the directors could borrow.

[edit]Judgment

Sir John Jervis CJ, for the Court of Exchequer Chamber affirmed the Queen’s Bench and said

that it was valid, so the Royal British Bank could enforce the terms of the bond. He said the

bank was deemed to be aware that the directors could borrow only up to the amount

resolutions allowed. Articles of association were registered in Companies House, so there

was constructive notice. But the bank could not be deemed to know about which ordinary

resolutions passed, because these were not registrable. The bond was valid, because there

was no requirement to look into the company’s internal workings. This is the ‘indoor

management rule’, that the company’s indoor affairs are the company’s problem. Jervis CJ

gave the judgment of the Court.

“I am of opinion that the judgment of the Court of Queen's Bench ought to be affirmed. I incline to think that the question which has been principally argued both here and in that Court does not necessarily arise, and need not be determined. My impression is (though I will not state it as a fixed opinion) that the resolution set forth in the replication [332] goes far enough to satisfy the requisites of the deed of settlement. The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the Company, be authorized to be borrowed: and the replication shews a resolution, passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; but the resolution does not otherwise define the amount to be borrowed. That seems to me enough. If that be so, the other question does not arise. But whether it be so or not we need not decide; for it seems to us that the plea, whether we consider it as a confession and avoidance or a special Non est factum, does not raise any objection to this advance as against the Company. We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and that the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here, on reading the deed of settlement, would find, not a prohibition from borrowing, but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have

”

a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done.

Pollock CB, Alderson B, Cresswell J, Crowder J and Bramwell B concurred.

[edit]Significance

The rule in Turquand's case was not accepted as being firmly entrenched in law until it was

endorsed by the House of Lords. In Mahony v East Holyford Mining Co [1] Lord Hatherly

phrased the law thus:

“When there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, those so dealing with them externally are not to be affected by irregularities which may take place in the internal management of the company. ”

So, in Mahoney, where the company's articles provided that cheques should be signed by

any two of the three named directors and by the secretary, the fact that the directors who

had signed the cheques had never been properly appointed was held to be a matter of

internal management, and the third parties who received those cheques were entitled to

presume that the directors had been properly appointed, and cash the cheques.

The position in English law is now superseded by section 40 of the Companies Act 2006,[2] but the Rule in Turquand's Case is still applied throughout many common law jurisdictions

in the Commonwealth. According to the Turquand rule, each outsider contracting with a

company in good faith is entitled to assume that the internal requirements and procedures

have been complied with. The company will consequently be bound by the contract even if

the internal requirements and procedures have not been complied with. The exceptions

here are: if the outsider was aware of the fact that the internal requirements and

procedures have not been complied with (acted in bad faith); or if the circumstances under

which the contract was concluded on behalf of the company were suspicious.

However, it is sometimes possible for an outsider to ascertain whether an internal

requirement or procedure has been complied with. If it is possible to ascertain this fact from

the company's public documents, the doctrine of disclosure and the doctrine of constructive

notice will apply and not the Turquand rule. The Turquand rule was formulated to keep an

outsider's duty to inquire into the affairs of a company within reasonable bounds, but if the

compliance or noncompliance with an internal requirement can be ascertained from the

company's public documents, the doctrine of disclosure and the doctrine of constructive

notice will apply. If it is an internal requirement that a certain act should be approved by

special resolution, the Turquand rule will therefore not apply in relation to that specific act,

since a special resolution is registered with Companies House (in the United Kingdom), and is

deemed to be public information.

[edit]

Turquand rule

According to the Turquand rule, each outsider contracting with a company in good faith is entitled to assume that the internal requirements and procedures have been complied with.The company will consequently be bound by the contract even if the internal requirements and procedures have not been complied with. The exceptions here are: if the outsider was aware of the fact that the internal requirements and procedures have not been complied with (acted in bad faith); or if the circumstances under which the contract was concluded on behalf of the company were suspicious.However, it is sometimes possible for an outsider to ascertain whether an internal requirement or procedure has been complied with. If it is possible to ascertain this fact from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply and not the Turquand rule. The Turquand rule was formulated to keep an outsider's duty to inquire into the affairs of a company within reasonable bounds, but if the compliance or noncompliance with an internal requirement can be ascertained from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply. If it is an internal requirement that a certain act should be approved by special resolution, the Turquand rule will therefore not apply in relation to that specific act, since a special resolution is registered with Companies House (in the United Kingdom), and is deemed to be public information.