Constitutional Contract
Cases on Constitution as Contract
Hickman v Kent or Romney Marsh Sheep-Breeders’ Association
[1915] 1 Ch 881
Astbury J held that the articles ……creates a contract, which affects members in their capacity as members, though not in a special or personal capacity (e.g. as director). As a member, Mr H was bound to comply with the company procedure for arbitrating disputes and could not resort to court.
Astbury J wrote ‘I think this much is clear, first, that no article can constitute a contract between the company and a third person; secondly, that no right merely purporting to be given by an article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as solicitor, promoter, director can be enforced against the company; and, thirdly, that articles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively.’
Southern Foundries (1926) Ltd v Shirlaw
[1940] AC 701 Lord Atkin wrote
“My Lords, the question in this case is whether the appellant company have broken their contract with the respondent made in December, 1933, that he should hold the office of managing director for ten years. The breach alleged is that under the articles adopted by the company, after the agreement, the respondent was removed from the position of director of the company by the Federated Foundries, Ld. There can be no doubt that the office of managing director could only be held by a director, and that upon the holder of the office of managing director ceasing for any cause to be a director the office would be ipso facto vacated. Under the articles in existence at the date of the agreement, by art. 89 the office of a director could be vacated on the happening of six various events, bankruptcy, lunacy, etc., including the giving by the director of one month’s notice to resign; while by art. 105 the company by extraordinary resolution could remove him from his office. I feel no doubt that the true construction of the agreement is that the company agreed to employ the respondent and the respondent agreed to serve the company as managing director for the period of ten years. It was by the constitution of the company a condition of holding such office that the holder should continue to be a director: and such continuance depended upon the terms of the articles regulating the office of director. It was not disputed, and I take it to be clear law, that the company’s articles so regulating the office of director could be altered from time to time: and therefore the continuance in office of the managing director under the agreement depended upon the provisions of the articles from time to time. Thus the contract of employment for the term of ten years was dependent upon the managing director continuing to be a director. This continuance of the directorship was a concurrent condition. ….
The action of the Federated was, I think I may say avowedly, taken for the sole purpose of bringing the managing director’s agreement to an end. I do not think that it could be said that the Southern committed any breach by adopting the new articles. But when the Federated acted upon the power conferred upon them in the new articles they bound the Southern if they acted in such a way that action by the Southern on the same articles would be a breach. It is not a question of agency but of acting under powers conferred by contract to interfere with a contract between the party granting the power and a third person. For these reasons I am of opinion that this appeal should be dismissed with costs.”
Rayfield v Hands
[1960] Ch 1 Vaisey J wrote
“ Now the question arises at the outset whether the terms of article 11 relate to the rights of members inter se (that being the expression found in so many of the cases), or whether the relationship is between a member as such and directors as such. I may dispose of this point very briefly by saying that, in my judgment, the relationship here is between the plaintiff as a member and the defendants not as directors but as members.
In In re Leicester Club and County Racecourse Co, Pearson J, referring to the directors of a company said that they “continue members of the company, and I prefer to call them working members of the company,” and on the same page he also said: “directors cannot divest themselves of their character of members of the company. From first to last, … they are doing their work in the capacity of members, and working members of the company. …” I am of opinion, therefore, that this is in words a contract or quasi-contract between members, and not between members and directors.”
Bushell v Faith
[1970] AC 1099
Lord Upjohn wrote
“My Lords, when construing an Act of Parliament it is a canon of construction that its provisions must be construed in the light of the mischief which the Act was designed to meet. In this case the mischief was well known; it was a common practice, especially in the case of private companies, to provide in the articles that a director should be irremovable or only removable by an extraordinary resolution; in the former case the articles would have to be altered by special resolution before the director could be removed and of course in either case a three-quarters majority would be required. In many cases this would be impossible, so the Act provided that notwithstanding anything in the articles an ordinary resolution would suffice to remove a director. That was the mischief which the section set out to remedy; to make a director removable by virtue of an ordinary resolution instead of an extraordinary resolution or making it necessary to alter the articles.
Parliament has never sought to fetter the right of the company to issue a share with such rights or restrictions as it may think fit. There is no fetter which compels the company to make the voting rights or restrictions of general application and it seems to me clear that such rights or restrictions can be attached to special circumstances and to particular types of resolution. This makes no mockery of section 184; all that Parliament was seeking to do thereby was to make an ordinary resolution sufficient to remove a director. Had Parliament desired to go further and enact that every share entitled to vote should be deprived of its special rights under the articles it should have said so in plain terms by making the vote on a poll one vote one share. Then, what about shares which had no voting rights under the articles? Should not Parliament give them a vote when considering this completely artificial form of ordinary resolution? Suppose there had here been some preference shares in the name of Mr. Faith’s wife, which under the articles had in the circumstances no vote; why in justice should her voice be excluded from consideration in this artificial vote?”
Attorney General of Belize v Belize Telecom Ltd
[2009] UKPC 10 (the Privy Council) Lord Hoffmann wrote
“28. The Board therefore turns to consider the question raised by the articles of association. Two things are immediately apparent. The first is that the board has been constructed so that its membership will reflect the interests of the various participants in the company: the political interest of the Government, represented through its special share; the economic interest (if any) of the Government, represented by its holding of C shares; the economic interests of the ordinary B and C shareholders. The second is that the powers which the articles confer upon the Government (or its successor as special shareholder acting upon its written instructions: see article 11(A)) are carefully graduated according to its economic interest in the company at the relevant time. Thus, the power to block certain board resolutions in article 113 is exercisable “at any time at which the holder of the special share is the holder of C Ordinary shares amounting to 25% or more of the issued ordinary share capital”. The power to block certain shareholder resolutions in article 8 is likewise exercisable “at any time” when the special shareholder has a 25% or more holding. And the power to appoint and remove special C directors is exercisable “at any time” when the special shareholder has a 37.5% or more holding.
29. In the case of board and shareholder resolutions, the relevant time for determining whether a blocking power exists is of course the time at which the resolution is proposed. In the case of appointments to the board, the draftsman appears to have assumed that it would be the time at which the appointment was made or the director was to be removed. In some cases, that would be sufficient to ensure that the board at any given time reflected the appropriate shareholder interests. For example, articles 90(B) and (C) give a majority of B shareholders the right to appoint and remove two directors. This is enough to ensure that the B directors will at any given time represent the interests of a majority of the B shareholders. If the majority lose confidence in their directors, or if there is a transfer of B shares which results in a different majority, it will always be open to the majority to remove the directors in office and appoint others. The same is true of the ordinary C directors appointed and removable by a majority of C shareholders under articles 90(D)(i) and 90(E).
30. The situation with which the articles do not expressly deal is where a change in shareholding results in the board no longer reflecting the appropriate shareholder interests, but without enabling this to be corrected by exercise of the power to remove directors. Assume, for example, that the special shareholder exercises its power under article 11(E) to require redemption of the special share. What then happens to the Government Appointed Directors appointed under article 88(A)? They cannot be removed from office because there is no longer a special shareholder who has power to do so. Does that mean that they remain in office indefinitely? The Board considers that, if one considers the role of the Government Appointed Directors and the policy of giving the Government the power to require redemption of the special share, namely, to enable it to relinquish its influence over the conduct of the company’s business, the articles cannot reasonably mean that the Government Appointed Directors should remain in office after the special share has ceased to exist. They must be read as providing by implication that when the special share goes, the Government Appointed Directors go with it. In the opinion of the Board it is no answer to say that the special shareholder could have thought of the problem in advance and removed the Government Appointed Directors before redemption. No doubt he could, but the question is what the articles mean in the situation in which he has not done so. Nor is it relevant that the articles could be amended. They must be construed as they stand.
31. If, as the Board thinks, it would plainly be necessary to imply such a term in relation to the Government Appointed Directors, it must follow that upon the redemption of the special share, the special C directors will also cease to hold office. They are also there by virtue of the special share and when there is no longer a special share, there will again be no one who has power under the articles to remove them. That means that the whole basis upon which they are distinguished from ordinary C directors appointed by the majority of the C shareholders under article 90(D)(i) has ceased to exist. It is true that article 90(E) says that C directors shall hold office “subject only to article 112”, but that cannot in the Board’s opinion be construed as contradicting the proposed implied term, to which the draftsman plainly did not address his mind. In any case, the words “subject only” cannot be read literally because, for example, the provisions for retirement by rotation in article 94 are expressly applied to C directors (other than special C directors.)
32. If implication is necessary to prevent what would otherwise be absurd consequences following from redemption of the special share, the Board considers that there is no difficulty about applying the same principle to the case in which the special shareholder continues to exist but no longer has the 37.5% holding which would entitle him to appoint and remove special C directors. In such a case too, the implication is required to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors, namely to ensure that the board reflects the appropriate shareholder interests in accordance with the scheme laid out in the articles.”
Mc Mahon -v- Irish Road Haulage Association
[2009] IEHC 145
“… counsel for the defendant was correct in submitting that in June 2006 the relationship between the plaintiff and the defendant was a contractual relationship. Section 25 of the Companies Act 1963 provides that, upon registration, the memorandum and articles of association of a company take on the status of a contract under seal and it is a contract which may be enforced by the company against its members and by the members against the company.
Secondly, as the defendant acknowledged in this case, the contract constituted by the articles of association and, in particular, the terms thereof in relation to the expulsion of a member of the company must be construed on the basis that there is implied therein an entitlement on the part of a member of the company to fair procedures when an issue as to the termination of his membership arises. The authority for this proposition is the decision of the Supreme Court in Glover v. B.L.N. Limited [1973] I.R. 388. In that case, which involved an action by an office-holder arising out of his summary dismissal for alleged misconduct, in his judgment Walsh J. stated (at p. 425):
……In essence, therefore, the wrong committed by the defendant in this case was a breach of the implied term in the statutory contract with the plaintiff constituted by the registration of the memorandum and articles of the defendant.
Barry -v- Medical Defence Union
[2005] IESC 41 Geoghegan J. wrote
“It is the respondent’s contention that the agreement between the appellant and the respondent arising from the Memorandum and Articles of Association by virtue of section 14 of the English Companies Act, 1985 (equivalent to section 25 of the Companies Act, 1963 in Ireland) is the one and only contract entered into between the parties. On the contractual issue it is, therefore, perfectly clear what the case of the respondent is. I should add that although changes have been effected in the Articles of Association over the years it is not in dispute that the above cited provisions have remained substantially unaltered.
……. It was never in dispute that there was in existence the statutory contract between the appellant and the respondent arising from the Memorandum and Articles of Association but at times counsel for the appellant suggested in the High Court and, indeed, partly suggested in this court that it was an implied term of the statutory contract that the appellant would be entitled to indemnity in the same way and on the same basis as if the respondent was an insurer. Furthermore, in the opening submissions before the learned High Court judge and, indeed, in other parts of the transcript it was urged on behalf of the appellant that this implied term existed from the very beginning of the appellant’s membership of the respondent i.e. 1963. It was later conceded that that was an optimum position and that it might not be possible for the appellant to establish such an implied term from the very beginning but that it certainly existed from the time that the general practitioners became subject to compulsory insurance. This submission whether in its original or modified form was and is at all times unsustainable for the simple reason that there is a clear principle of law that a term may not be implied into a contract if it contradicts an express term. I would not have thought that any authority would be required for that obvious proposition but, in fact, as pointed out by the learned High Court judge in her judgment, it is to be conveniently found in a judgment delivered by Murphy J. in this court with which Hamilton C.J. and Barrington J. agreed in Sweeney v. Duggan [1997] 2 I.R. 531. Carroll J. cites the relevant passage starting at 539 which is in the following terms.
“Whether a term is implied pursuant to the presumed intention of the parties or as a legal incident of a definable category of contract it must be not merely reasonable but also necessary. Clearly it cannot be implied if it is inconsistent with the express wording of the contract and furthermore it may be difficult to infer a term where it cannot be formulated with reasonable precision.”
Counsel for the respondent make the further point that under English case law (they cite Bratton Seymour Service Co. Limited v. Oxborough [1992] BCLC 693) it was never permissible to imply into Articles of Association a term not on the basis of a construction or implication derivable purely from the consideration of the language of an instrument but on the basis of extrinsic evidence of surrounding circumstances. It is not necessary for me to consider whether that represents good law in this jurisdiction also. Having regard to the ordinary principles which I have mentioned a term in contradiction of the express terms could not have been implied at any rate.
A variant on the “implied term” argument was that, at least from the stage when compulsory insurance was required, the terms of the statutory contract were not exclusively contained in the Memorandum and Articles of Association but that they were added terms. This submission suffers from the same infirmity in that the only added terms suggested would have been implied terms and there could not be added implied terms which contradicted the express terms.
Lisavaird Sales Ltd & anor -v- Muingnaminnane Windfarms Ltd
[2013] IEHC 498 Kearns P. wrote
“I cannot accept the contention advanced on behalf of the plaintiff that this transaction constituted a “special contract” such as would circumvent the application of s.45 of the Companies (Amendment) Act 1983. Nor do I think that the decision of the High Court of Australia in Bailey v. New South Wales Medical Defence Union Ltd. [1995] H.C.A. 28 is of any particular assistance to the plaintiff.
In that case the High Court found that a special contract could legitimately be brought into existence between a company and a member (which might or might not be defined by reference to its articles). It was in circumstances where the nature of the special contract did not conflict with any statutory provision, such as arises in the instant case by application of s.45 of the Act of 1983.
In Bailey’s case, the plaintiff, Mrs. Bailey, was the widow of Dr. Bailey who had been sued for medical negligence. Dr. Bailey was initially indemnified by the defendant union, but the union later withdrew cover and the patient obtained judgment against both Dr. Bailey’s estate and the union. Judgment was also given in favour of Dr. Bailey’s estate and the union appealed. The issue on appeal was whether or not the union was liable to indemnify Dr. Bailey’s estate and the matter turned on the construction of the union’s articles of association. These articles provided an indemnity for members and their personal representatives against liability for damages arising out of any claim against a member for professional acts or omissions. The articles of association were amended after Dr. Bailey joined the union to provide the union with absolute discretion in deciding whether or not to indemnify a member. Notwithstanding the refusal of indemnity by the union, the court held:-
“There can be no doubt that during each of the years in which Mr. Crawford suffered injury there was a contract of insurance between the Union and Dr. Bailey. Nor, in our view, can there be any real doubt that, notwithstanding that its terms were largely to be found in the company’s articles, the contract was made individually with Dr. Bailey as an insured and was therefore a special or actual contract which was distinct from the covenants which were deemed to arise from the articles under the relevant companies legislation.”
The court very reasonably took the view that it could not have been the intention of the parties that insurance cover already purchased upon terms contained in the articles should be diminished by a subsequent alteration to those articles.
However, the issue in the instant case is not whether a special contract can be created between a company and one of its members, but rather whether a special contract made between a company and its members can operate in such a way as to displace or circumvent s.45 of the Act.
While …….. the plaintiffs’ solicitor, stated her belief that this device had been successfully utilised in other cases, no practical instances were in fact demonstrated, nor was any legal precedent cited to suggest that such a device had passed legal scrutiny by courts in this jurisdiction.
On this aspect of the case, therefore, I am satisfied that the plaintiffs cannot succeed.