Southern Foundries (1926) Ltd v Shirlaw
Court of Appeal
Citations:  2 KB 206;  2 All ER 113.
D1 was a company. In 1933, they contracted with the claimant (one of D1’s directors) for the claimant to act as managing director for ten years. Under D1’s articles of association, managing directors had to vacate their positions if they ceased to be normal directors.
In 1935, D2 (another company), acquired all shares in D1. By special resolution, they adopted additional new articles of association. These articles created a new power to remove directors. D2 used this power to remove the claimant from his office as an ordinary director. This forced the claimant to step down as managing director.
The claimant sued D1 for wrongful repudiation of their contract. They also sued D2 for wrongly procuring or causing a breach of contract. The defendants responded that the contract did not prohibit D1 from removing the claimant as an ordinary director. Alternatively, if the contract did prohibit this, this prohibition was not breached because D2 was responsible for removing the claimant, not D1.
- Had D1 acted in repudiatory breach of contract by removing the claimant from office?
- Did it matter that D2 was technically the one responsible for removing the claimant from office?
The Court of Appeal held that there was an implied term in the contract between D1 and the claimant. This term prohibited D1 from revoking the claimant’s ordinary director-status for the duration of his term as managing director.
There was also an implied term that D1 would not alter its articles of association in a way which allowed D1 or others to remove the claimant from office before the end of his term of office. D1 was therefore in breach by putting D2 into a position where they could remove the claimant from office.
This Case is Authority For…
MacKinnon LJ set out a test for deciding whether to imply a term in fact into a contract:
‘if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!”
Sir Wilfrid Greene MR disagreed with the other judges on the existence of implied terms. He thought that the two offices or director and managing director were distinct. A company appointing a managing director would not necessarily want to bind itself to keep that person as an ordinary director. The judge expected such a stipulation to be an express part of the agreement, had the parties actually intended it.