Southern Foundries Ltd v Shirlaw [1940] AC 701 is an important English contract law

English contract law

English contract law is a body of law regulating contracts 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 across the Commonwealth , and the United States...

 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

Officious bystander

The officious bystander is a metaphorical figure of English law, developed by MacKinnon LJ in Southern Foundries Ltd v Shirlaw to assist in determining when a term should be implied into an agreement. While the officious bystander test is not the overriding formulation in English law today, it...

" 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 castings. 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 friend 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

Breach of contract is a legal cause of action 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 party's performance....

, claiming for an injunction

Injunction

An injunction is an equitable remedy in the form of a court order that requires a party to do or refrain from doing certain acts. A party that fails to comply with an injunction faces criminal or civil penalties and may have to pay damages or accept sanctions...

 to stay in office or substantial damages

Damages

In law, damages is an award, typically of money, to be paid to a person as compensation for loss or injury; grammatically, it is a singular noun, not plural.- Compensatory damages :...

.

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.

See also

• UK company law
• Imperial Hydropathic Hotel Co, Blackpool v Hampson
  Imperial Hydropathic Hotel Co, Blackpool v Hampson
  Imperial Hydropathic Hotel Co, Blackpool v Hampson 23 Ch D 1 is a UK company law case, concerning the interpretation of a company's articles of association...
  
  (1882) 23 Ch D 1
• Isle of Wight Railway Company v Tahourdin
  Isle of Wight Railway Company v Tahourdin
  Isle of Wight Railway Company v Tahourdin LR 25 Ch D 320 is a UK company law case on removing directors under the old Companies Clauses Act 1845. In the modern Companies Act 2006, section 168 allows shareholders to remove of directors by a majority vote on reasonable notice, regardless of what the...
  
  (1884) LR 25 Ch D 320