[COURT OF APPEAL]

SHIRLAW v. SOUTHERN FOUNDRIES (1926), LIMITED.

[1937. S. 1835.]

Company - Director - Agreement for employment as managing director for ten years - Articles of Association - Article providing that subject to any contract a managing director was to be removable in the same manner as other directors - Implied term of agreement that irremovable during the fixed term - No power to alter articles so as to permit of removal during that time.

The first defendant was a company (hereinafter called "the company") which by an agreement dated December 21, 1933, appointed the plaintiff, who was then a director, to be managing director for a term of ten years. Art. 91 of the company's articles of association provided that a managing director should "subject to the provisions of any contract between him and the company be subject to the same provisions as to .... removal as the other directors of the company and if he cease to hold the office of director he shall ipso facto and immediately cease to be a managing director." Art. 105 gave the company power to remove a director before the expiration of his period of office. In 1935 the second defendant (hereinafter called "the Federated Company"), which was a company formed to take over the shares of a number of companies, including the company, acquired all the shares of the company. By a special resolution passed on April 17, 1936, the existing articles of association of the company were abrogated and new articles adopted. Art. 8 empowered the Federated Company by an instrument subscribed by two directors and the secretary to remove any director of the company. Art. 9 provided that a director need not hold a share qualification. The new articles incorporated a large part of Table A, including art. 68, which made a managing director's appointment subject to determination ipso facto if he ceased to be a director. On March 27, 1937, an instrument subscribed as above was delivered to the company removing the plaintiff from the office of director, and the company thereupon treated him as ceasing to be managing director. The plaintiff commenced proceedings claiming damages as against the company for wrongful repudiation of the agreement and as against the Federated Company for wrongly procuring, causing or inducing the company's breach of the agreement.

Humphreys J. awarded 12,000l. damages against both defendants:-

Held, by the Court of Appeal (MacKinnon and Goddard L.JJ., Sir Wilfrid Greene M.R. dissenting on the first point, but concurring on the second and third points), (1.) that it was an implied term of the agreement of December 21, 1933, that the company should not remove the plaintiff from his position of director during the term of years for which he was appointed managing director; (2.) that it was an implied term that the

company would not alter its articles of association so as to create a right in the company or any one else to remove the plaintiff from his position of director during the same term of years; and (3.) that there was no ground for reducing the amount of damages.

APPEAL from Humphreys J.

The first defendant, Southern Foundries (1926), Ld. (hereinafter referred to as "Southern"), was incorporated in 1926 to carry on the business of the manufacture of iron castings. By an agreement dated December 21, 1933, the plaintiff, who was then a director of Southern, was (clause 1) appointed to be the managing director. Clause 2 provided that the plaintiff should hold this office for ten years from December 1, 1933; clause 3 that unless prevented by ill-health the plaintiff should "throughout the said term" devote his whole time, attention and abilities to the business of Southern (subject to clause 10); and clauses 4 and 5 that the plaintiff should be paid a fixed salary of 1700l. per annum rising by annual instalments of 100l. to 2000l. per annum and a commission at the rate of 5 per cent. on the net profits of the company. Clause 8 provided that if the plaintiff should fail for six consecutive months to fulfil his obligations to Southern, the company might by notice in writing determine the agreement. Clause 10 allowed the plaintiff to hold a directorship in Steel Parts, Ld., a company in which he had an interest, and to devote certain limited time to that company's business. By clause 11 the plaintiff was not during the continuance of the agreement or within three years after its termination to engage without the consent of Southern in the business of a foundry within one hundred miles of Southern's works at Croydon, and by clause 12 he was not at any time to solicit customers of Southern.

The articles of association of Southern included the following material provisions: "Art. 89. Subject as herein otherwise provided or to the terms of any subsisting agreement, the office of a director shall be vacated ....

"(E) If he wilfully absent himself from the meeting of the directors for a period of six consecutive calendar

months without special leave of absence from the other directors and they pass a resolution that he has by reason of such absence vacated his office;

"(F) If he gives the directors one month's notice in writing that he resigns his office. ....

"Art. 90. The directors may from time to time appoint any one or more of their body to be a managing director or managing directors, for such period and upon such terms as they think fit. ....

"Art. 91. A managing director shall not while he continues to hold that office be subject to retirement by rotation and he shall not be taken into account in determining the rotation of retirement of directors, but he shall, subject to the provisions of any contract between him and the company, be subject to the same provisions as to resignation and removal as the other directors of the company, and if he cease to hold the office of director he shall ipso facto and immediately cease to be a managing director.

"Art. 105. The company may by extraordinary resolution remove any ordinary director before the expiration of his period of office, and may, if thought fit, by ordinary resolution appoint another director in his stead; ...."

In 1935 the second defendant, Federated Foundries, Ld. (hereinafter called "Federated"), was incorporated to acquire the whole or part of the share capital of a number of companies, including Southern, and to promote the co-operation of these companies as well with one another as with Federated, and Federated in fact acquired the whole of the shares of Southern.

By a special resolution passed on April 17, 1936, the existing articles of association of Southern were cancelled and abrogated and new articles of association adopted in lieu thereof. These new articles of association incorporated Table A in the First Schedule to the Companies Act, 1929, so far as not excluded, altered or modified or inconsistent with certain special articles, of which art. 8 provided:-

"Subject to the immediately preceding article [which fixed the maximum and minimum number of directors] Federated Foundries, Ld., shall have power at any time and from time

to time by an instrument in writing subscribed on its behalf by two of its directors and its secretary to appoint any person to be a director of the company and to remove from office any director of the company. ...."

Art. 9 provided that a director should not be required to hold a share qualification.

Art. 68 of Table A, which was unaffected by the special articles, provided: "The directors may from time to time appoint one or more of their body to the office of managing director .... for such term and at such remuneration .... as they may think fit, and a director so appointed shall not, while holding that office, be subject to retirement by rotation, or taken into account in determining the rotation of retirement of directors; but his appointment shall be subject to determination ipso facto if he ceases from any cause to be a director. ...."

Subsequently differences arose between the plaintiff and Federated, and on March 25, 1937, it was resolved at a meeting of the board that the plaintiff should be removed from the board of Southern and a notice was signed by two directors and the secretary in the following terms: "We Federated Foundries, Ld., in terms of Article 8 of the articles of association of Southern Foundries (1926), Ld., hereby remove Mr. Alan Shirlaw .... from his office as director of Southern Foundries (1926), Ld." On March 27, 1937, this notice was delivered to Southern and deposited at their registered office. Thereupon Southern treated the plaintiff's appointment as managing director as terminated.

In these circumstances the plaintiff brought this action claiming damages as against the Southern for their wrongful repudiation of the agreement of December 21, 1933, and as against the Federated for wrongly procuring, causing and inducing Southern's breach of the agreement.

Humphreys J. said that the agreement of December 21, 1933, was clearly an agreement to employ the plaintiff as managing director of Southern for ten years, and it was essential that the plaintiff should remain a director if he was to continue to be managing director. As a result of alterations

to the articles of association of Southern Federated were given power to remove a director from the board of Southern. But the fact that they had that power did not touch the question whether Southern had any right to repudiate the agreement, as they undoubtedly had done. The agreement being for a ten years' appointment, how could Southern justify their action? It was argued that regard must be had to their articles of association. He agreed that, if, as the articles of association existed at the time of the agreement, it was ultra vires for Southern to enter into the agreement, the articles alone would be material. But, as this was not so, the agreement spoke for itself, and it did not appear to him that anything in the articles authorized what had been done. Art. 90 enabled the directors to enter into an agreement appointing a managing director for ten years, and, although art. 91 preserved the right to remove him from being a director, that was made "subject to the provisions of any contract" and they could not override the contract entered into with a managing director. So far he could see nothing to justify the plaintiff's removal.

But it was said that the defendants had acted legally in getting rid of the plaintiff as a director under the terms of the articles of association existing at the time it was done, and that there was nothing in the agreement to say that the plaintiff should continue to hold the office of director for ten years. In his judgment the short answer was that this was quite obviously implied. In his opinion it was perfectly clear that it was an implied term of the agreement that Southern should not during that time use any power it had to do anything to the plaintiff which would prevent him from being managing director.

Then it was said that it was not Southern that had removed the plaintiff from the position of director, though it might be that as parties to the agreement they were responsible. The second defendants were charged, however, with aiding and abetting and procuring Southern to break the agreement. That they did not do, because they turned the plaintiff out of office themselves. That argument almost deserved the

description of immoral. It was a highly technical way of looking at the matter. He thought the plaintiff's case was correctly put in the statement of claim by alleging that Southern had wrongfully repudiated the agreement and that Federated wrongly procured, caused and induced Southern to be guilty of the breach of the agreement complained of. Therefore the plaintiff succeeded against both defendants.

The question of the amount of damages was argued subsequently, and Humphreys J. fixed the damages at 12,000l.

The defendants appealed. The appeal was heard on February 15 and 16 and judgment given on March 17, 1939.

Cyril Radcliffe K.C. and Valentine Holmes for the appellants. Two points arise here: (1.) whether on the construction of the agreement of December 21, 1933, appointing the respondent to be managing director there has been any breach of that agreement; and (2.) whether, if there has been a breach, the damages of 12,000l. awarded to the respondent are unreasonably large and should be the subject of a review.

In considering the construction of the agreement regard must be had to the articles of association of Southern as they existed at the date of the agreement. Under art. 90 the directors are given power to appoint any one of their body to be a managing director. Art. 91 provides that a managing director is not to be subject to retirement in rotation like the ordinary directors, but that "subject to the provisions of any contract between him and the company" he is to be subject to the same provisions as to resignation and removal. The general power of removal is conferred by art. 105. The words "ordinary director" there are not contrasted with a managing director but with special directors for debenture holders. There is also a provision for removal in art. 89 (E) and for resignation in art. 89 (F). If then there is nothing in the agreement to exclude the normal right of removal, the respondent could properly have been removed under those articles. Humphreys J. treated the appointment of the respondent to be managing director for a fixed term of years as guaranteeing him in the office of director for that period.

It is contended that there is nothing in the agreement by which the company contract out of the right to remove him from being a director. This agreement has nothing to do with the respondent's position as director in default of an express provision dealing with it. Art. 91 clearly contemplates that in default of such an express provision a director may be removed from his position as such although he has been appointed a managing director for a fixed term.

[MACKINNON L.J. The real point is whether the definite agreement that the respondent was to be managing director for ten years was in effect a provision preventing his retirement or removal from the post of director during that time.]

It is inconceivable that there should be a contracting-out of the powers of removal in the absence of an express provision to that effect. The power of removal conferred by art. 105 is vested in the members of the company and requires an extraordinary resolution. In view of the terms of art. 91 an express contract is required to take away that power. The agreement is dealing entirely with the position of managing director and has nothing to do with that of a director. Thus clause 8 of the agreement gives the company power to determine the agreement in certain circumstances. This shows how distinct the positions of director and managing director are kept.

Further, the whole position was altered when the Federated were incorporated to promote the co-operation of eleven foundry companies, of which the Southern was one, by vesting the control in Federated. All the shares of Southern, including those held by the respondent, were exchanged for shares in Federated. In consequence of this merger new articles were adopted by Southern, and art. 8 gave Federated powers to remove any director of Southern. Further, amongst the parts of Table A made applicable is art. 68, which provides that the appointment of a managing director shall determine ipso facto if he ceases to be a director, and there is under art. 68 no power to contract out. The removal of the plaintiff from the position of director was effected by Federated, and it followed that he ceased to be managing director. It

follows that there has been no breach of the contract of service on any view, because it was Federated and not the Southern that deprived the respondent of his directorship, and as a result he ceased under art. 68 to be the managing director.

There are no authorities that are conclusive on the issue here, but Bluett v. Stutchbury's, Ld. (1), and Nelson v. James Nelson & Sons, Ld. (2), have some bearing on it. Really the whole question here is whether there has been a breach of contract.

F. R. Evershed K.C. and J. P. Ashworth for the respondent. There is no doubt that it was within the power of Southern to appoint a managing director on the terms that he should not be entitled to put an end to his appointment by resigning from the post of director, and that the company should not be entitled to do so by removing him from that post. The right thing then is to see as a matter of ordinary language what the contract of service says and how it fits in with the articles of association. When clause 2 provides that the plaintiff shall hold the office of managing director for ten years "shall" means "shall be bound to" and not "shall be entitled to." At the least it means "shall be entitled to" and there may be a question whether it does not mean "shall be bound and entitled to." Clause 3 shows that "shall" is used in an obligatory sense. It is not true to say that for the respondent to succeed the contract must contain something amounting to a guarantee that he should not lose his office. That is not so. The respondent could not retain his office if he became insane or was convicted of an indictable offence or became bankrupt. The effect of clause 2 is that it would be a breach of contract for the company to put an end to the agreement by removing him from the position of director. Anything the company does to bring the contract to an end during the fixed term is a breach: see Fowler v. Commercial Timber Co. (3) It is of the essence of the contract in the present case that neither party should be able to determine it at will. No doubt art. 91

(1) (1908) 24 Times L. R. 469.

(2) [1914] 2 K. B. 770.

(3) [1930] 2 K. B. 1.

of the original articles of association reserved the right to remove the director, although appointed managing director, but that was subject to the terms of any contract, and the effect of the contract here is to put an end to that power during the fixed term: compare what is said by Swinfen Eady L.J. in Nelson v. James Nelson & Sons, Ld. (1)

There remains the question whether there was a breach by Southern. The Court should approach that on the view that there was an express obligation on the company to retain the respondent in the office of managing director for ten years. That being the undertaking so far as Southern was concerned, that company could do nothing conferring a right of removal on some one else: see Stirling v. Maitland. (2) The combined effect of the alteration of Southern's articles so as to confer on Federated a right of removal of the respondent from the position of director followed by the exercise of that right by Federated constituted a breach of contract. Southern cannot rely on the fact that Federated actually effected the removal, because Southern had conferred on Federated the power to do so. Humphreys J. was therefore right in his decision.

Cyril Radcliffe K.C. replied, and then proceeded to argue that the damages were in any case excessive.

1939. Mar. 17. SIR WILFRID GREENE M.R. This is an appeal from a judgment of Humphreys J. sitting without a jury by which the respondent, who was the plaintiff in the action, was awarded against the appellants the sum of 12,000l. by way of damages.

The respondent's claim against the first defendants, Southern Foundries (1926), Ld. (which I will call "Southern"), was based on alleged wrongful dismissal from the office of managing director which he held in Southern. As against the second defendants, Federated Foundries, Ld. (which I will call "Federated"), the claim was based on an allegation

(1) [1914] 2 K. B. 770, 780.

(2) (1864) 5 B. & S. 840, 852.

that Federated had wrongfully procured Southern to dismiss the respondent from his office. It was not disputed before us that, if the claim against Southern were well-founded, Federated was also liable for the reason alleged.

The appellants before us challenged the judgment of Humphreys J. on the ground that the dismissal which admittedly took place was not wrongful. Alternatively, they say that the damages ought to be reduced.

The agreement by which the respondent was appointed managing director of Southern is dated December 21, 1933. At that time all, or practically all, the shares in Southern were held by or on behalf of Sir Berkeley Sheffield, who was a party to the agreement. The respondent, who was a director of Southern, had a large interest in a company called Steel Parts, Ld. The agreement recited that Southern (therein called "the company") was "desirous of appointing Mr. Shirlaw to be managing director and Mr. Shirlaw has agreed to accept the appointment for the consideration hereinafter mentioned and also in consideration of Sir Berkeley Sheffield providing further finance for Steel Parts, Ld., to the extent hereinafter specified." Clauses 1 and 2 of the operative part were in the following terms: "(1.) Mr. Shirlaw shall be and he is hereby appointed managing director of the company and as such managing director he shall perform the duties and exercise the powers which from time to time may be assigned to or vested in him by the directors of the company. (2.) Mr. Shirlaw shall hold the said office for the term of ten years from the 1st day of December, 1933." By clause 3 the respondent agreed that, unless prevented by ill health, he would "throughout the said term devote the whole of his time attention and abilities to the business of the company," subject to clause 10, that he would comply with the orders of the board, and that he would well and faithfully serve the company and use his utmost endeavours to promote its interest. Under clauses 4 and 5 the respondent was to receive remuneration on a fixed scale, plus a commission on the net profits of the company. By clause 8 the company was empowered by written notice to

determine the agreement if the respondent failed for six months to fulfil his obligations to the company thereunder. Clause 9 provided that the respondent should have no claim for damages if his "tenure of office" should be determined by the winding up of the company. By clause 10 the respondent was given the right to do a certain amount of work for Steel Parts, Ld. By clause 11 he was prohibited during the continuance of the agreement and a further period of three years from carrying on or being engaged in the foundry business within 100 miles of the company's works at Croydon. By clause 12 he undertook not to solicit or deal with certain customers or to represent himself as connected with or interested in the company at any time after the termination of the agreement. By clause 13 Sir Berkeley Sheffield agreed to pay the respondent 300l. in respect of his living expenses in London during the first six months of the agreement and his costs of removal to London. By clause 14 Sir Berkeley Sheffield and the respondent each agreed to subscribe and pay for 2000 1l. preference shares in Steel Parts, Ld. By clause 15 the respondent agreed to purchase Sir Berkeley Sheffield's preference shares in Steel Parts, Ld., upon any breach by the respondent of his obligations in respect of the company under the agreement. By clause 16 Sir Berkeley Sheffield gave the respondent the option at any time to purchase his preference shares in Steel Parts, Ld.

On April 17, 1936, a special resolution of Southern was passed adopting new articles of association. At that date Federated had become the beneficial owners of all or practically all the shares in Southern. By art. 8 of the new articles Federated was empowered by an instrument in writing subscribed on its behalf by two of its directors and its secretary to remove from office any director of Southern, such instrument to take effect as from the time of its deposit at the registered office of Southern. This power was exercised against the respondent by an instrument in writing dated March 25, 1937, which was deposited at the registered office of Southern on or about March 27, 1937. The effect of this operation was that the respondent ceased to be a director

of Southern as from the deposit of the instrument and, as a consequence, he ceased to be managing director of Southern.

A managing director is a director with powers of management delegated to him by the board of directors, and it is an essential requirement of his office as managing director that he should hold the office of a director. A managing director who is not a director is a contradiction in terms. It is for this reason that the common form articles provide (as the articles of Southern in force at the date of the agreement did provide) that a managing director must be appointed from among the directors and shall cease to be managing director if he ceases to hold the office of director. It would, accordingly, have been ultra vires the board of Southern to appoint the respondent as managing director upon the terms that he should continue to be managing director after he had ceased to be a director, and the agreement, if it had purported so to provide (which it did not), would to that extent have been inoperative.

Mr. Radcliffe for the appellants contended that, according to the true construction of the agreement, the termination in the manner stated of the respondent's tenure of office as director of Southern was not a breach of the agreement by Southern, notwithstanding the fact that it necessarily involved the termination of the respondent's tenure of office as managing director. His main argument was that the agreement contained no express or implied undertaking on the part of Southern either that the respondent should retain his office of director during the term of the agreement or that Southern would not terminate his tenure of that office. He argued, secondly, that, even if the agreement be construed as containing such an express or implied undertaking, there had been no breach of it by Southern, since the respondent's tenure of directorship was terminated not by Southern but by Federated.

Mr. Evershed, on behalf of the respondent, on the other hand, in answer to the appellants' main argument, disclaimed any intention of reading into the agreement an implied term either to the effect that during the ten year period the

respondent should hold the office of director or to the effect that during the term Southern would do nothing to remove him from the office of director. For reasons which will appear later, it would not, in my opinion, be legitimate to imply any such term and Mr. Evershed was right in not seeking to do so; but he said that the agreement expressly provides that the respondent is to hold the office of managing director for ten years and that this means that he is to be both a director and managing director for that period. He admitted, however, that the language does not import an undertaking by the company in the nature of a guarantee that the respondent shall in any event hold both offices for ten years. He argued that it was unnecessary for him to specify what qualification is to be applied to the words "shall hold the said office" (scilicet, that of managing director) "for the term of ten years" so as to make them something less than such a guarantee and contented himself with asserting that, whatever the true qualification may be, it cannot include the case where it is the action of Southern that terminates the tenure of the directorship. In answer to the appellants' second argument, Mr. Evershed maintained that it was in truth the action of Southern which led to the respondent's dismissal from the office of director, since, by altering its articles, Southern placed it in the power of Federated to bring about his dismissal.

The office of managing director is of a very special kind, and an agreement appointing a managing director cannot be treated as an ordinary service agreement as in the case of a mere manager. A managing director is, as I have said, a director to whom the board, being empowered to do so by the articles of association, delegates its powers of management or some of them; and this delegation is usually, if not invariably, made subject to the overriding authority of the board. "Management" here means the management of the company's business or part of it, as the case may be. There is no delegation of the remaining powers of the board. Such important matters as (to take a few examples) the financial policy of the company, the dividends to be declared, and the issue of new shares are all reserved to the board.

The result of this is that it is by no means a foregone conclusion that a company or its board will be willing to bind itself to keep as a director a member of the board whom it considers suitable to be a managing director. A director may be an excellent manager and therefore well qualified to be a managing director; but he may turn out to be an undesirable member of the board in other respects.

It is for this reason that it is, in my opinion, impossible, in an agreement appointing a managing director, to imply a term that he shall hold or not be removed from the office of director during the period for which he is appointed managing director. The officer of director is one thing; the office of managing director is a different thing. In every case where a managing director is appointed he is necessarily appointed for a period. In many cases there is no written agreement, the terms of the appointment being found in a resolution of the board, and in such a case the minimum period of the appointment, if not specified in the resolution, would have to be ascertained on ordinary principles; but in any case there would be a minimum period, and I have never, before the present case, heard it suggested, nor do I think it possible to suggest, that by merely appointing a director to be managing director for a period, however short or however long, the company impliedly binds itself to keep him in or not to remove him from the office of director.

Another matter which must be borne in mind in considering an agreement appointing a managing director is the fact that the powers of the board to make the appointment are limited to those conferred by the articles. By art. 91 of the original articles of Southern which were in force when the agreement was made, the directors were empowered to make a contract appointing a managing director, which excluded the operation of the provisions of the articles relating to resignation and removal of a director. Resignation is dealt with in art. 89 (F) and removal in art. 105 (where the word "ordinary" must, I think, mean a director not appointed by debenture holders under art. 86) and possibly in art. 89 (E). Moreover, the reference in art. 89 to "the terms of any subsisting agreement"

must, I think, imply a power in the directors to appoint a managing director upon the terms that during the period of the appointment some, at any rate, of the other provisions of that article as to the vacation of the office of director are not to apply.

It was, therefore, within the power of the board in appointing a managing director to provide in the agreement (1.) that he should not be entitled to resign his office as director; (2) that the power to remove him from that office should not be exercised; and (3.) that his office as director should not be vacated in some, at any rate, of the other ways specified in art. 89. If the directors of Southern, when they appointed the respondent to be managing director, had wished to exercise the power to make such a provision, I should have expected them to say so expressly in the agreement; and I should have expected them to specify in terms which of the various causes determining the respondent's tenure of his directorship were to be excluded from applying. Even on Mr. Evershed's argument this latter point is left completely in doubt, since he declined to commit himself beyond saying that resignation and removal were excluded. But, although I should have expected to find an express exclusion in the agreement, I do not think that the reference to "the provisions of any contract" in art. 91 and that to "any subsisting agreement" in art. 89 necessarily require an express exclusion to make the agreement intra vires; it would be sufficient if the agreement by necessary implication excluded resignation or removal or any of the other matters, and so we are brought back to the question whether, upon its true construction, the present agreement relieves the respondent from the possibility of removal from his directorship.

At the risk of repetition, I must again point out the importance of bearing in mind that the offices of director and managing director are quite different. A managing director must be a director, since the tenure of that office is a sine qua non to his tenure of the office of managing director; but an agreement appointing a director to be managing director, whether the period of his appointment be short or long, does

not and cannot of itself mean that he is to hold the office of director during the whole of that period. An appointment to the office of managing director for a period assumes that the person appointed will remain a director during that period; it does not ensure it any more than the appointment of a member of a club to be president of the club for a period ensures that he will remain a member of the club for that period, although it assumes that he will.

In some forms of the common article which provides for the appointment of a managing director there is no such power as exists in the present case, by virtue of the words "subject to the provisions of any contract," to exclude the operation of provisions in the articles relating to removal from the office of director (see, for example, Palmer's Company Precedents (15th ed.), vol. i., p. 693, form 97 and note). If Mr. Evershed's argument is right, an agreement appointing a managing director for a fixed term would, in a case where such a form was adopted, be ultra vires the board, since on its true construction (and this is a question of construction) it would be providing that during the term the person appointed should not be subject to removal from his directorship. The true view, in my opinion, would be not that the agreement was ultra vires the directors, but that upon its true construction it did not exclude the power of removal.

The agreement of December 21, 1933, falls into four divisions. These are (a) the clauses (1 to 10) relating to the appointment of the respondent to the office of managing director and his rights and duties as such; (b) the clauses (11 and 12) which impose restrictions upon him during and after the termination of the agreement; (c) the clause (13) under which Sir Berkeley Sheffield agrees to pay certain expenses of the respondent; and (d) the clauses (14 to 16) relating to shares in Steel Parts, Ld. Of these (c) and (d) embody agreements between Sir Berkeley Sheffield and the respondent. Southern is not concerned with them; but the provision of finance by Sir Berkeley Sheffield for Steel Parts, Ld., is part of the consideration for the respondent's agreement to accept the appointment as managing director.

Taking the group of clauses under head (a) by themselves, I cannot interpret them as affecting in any way the respondent's tenure of office as director. They are in common form and are taken practically verbatim from the form which appears on p. 693 of the first volume of Palmer's Company Precedents, already referred to. I do not think that the effect of this common form of agreement is to deprive the company of its powers of terminating the managing director's tenure of the quite separate office of director or the managing director's power as a director to resign that office, thus compelling the managing director to perform and the company to allow him to perform functions quite outside the scope of his employment as managing director. In effect, it would mean that the managing director agreed to serve the company and the company agreed to employ him not only as managing director, an office with one set of functions (which is all that in terms the parties agree to), but also as director, an office with a different set of functions (which the parties do not in terms agree to). If it is desired to produce such an effect and the articles of association allow it to be produced, words must be inserted sufficient for the purpose. The mere appointment to the office of managing director and the provision that the office shall be held for a term of years are not in my opinion sufficient. The "office" referred to in the agreement is the office of managing director; not that office coupled with the separate and distinct office of director. As I have already said, an agreement appointing a managing director for a term of years assumes that during the term he will continue to be a director; it ought not, in my opinion, to be interpreted as making provision expressly or impliedly to that effect.

Mr. Evershed's argument appears to me to be open to a further fatal objection. As a matter of construction and apart from any question of ultra vires, I can see no middle course between holding that the agreement applies to all ways by which the tenure of the directorship may come to an end and holding that it does not apply to any. If the former were the correct interpretation, the agreement would amount to a guarantee that the respondent should remain a director

during the whole term of ten years. It clearly cannot have this effect, and Mr. Evershed did not suggest that it has. He said, however, that it does amount to a stipulation that the respondent should not cease to hold his directorship for any cause within the control of himself or the company; for example, resignation or removal. I can find no justification for taking this middle course. It would be equivalent to inserting a proviso to the effect that the respondent's tenure of his directorship was to be terminable by any means not within the control of himself or the company.

I am of opinion, therefore, that these clauses cannot be construed either as a stipulation that the respondent shall hold the office of director during the term in any event or as a stipulation that he shall not cease to hold that office by any means within the control of himself or the company and in particular by removal. These clauses have, in my opinion, nothing to do with the office of director as such.

It remains to consider whether the other clauses in the agreement justify a different construction. In my opinion they do not. The restrictive clauses are taken practically verbatim from the form in Palmer to which I have referred. Neither in that form nor in the present agreement do they affect the construction of the clauses relating to the managing directorship. The agreements with Sir Berkeley Sheffield do not carry the matter any further. None of these sets of clauses, in my opinion, entitles me to construe the provisions as to the managing directorship in the way suggested by Mr. Evershed or to read into them (as the learned judge did) an implied undertaking by Southern that the power of removal from the office of director should not be exercised against him. It is no doubt true that the provisions contained in these clauses suggest that the parties anticipated a long life for the agreement; and it may be tempting to place upon it a construction which would give effect to this anticipation. This is a temptation to which I am not prepared to succumb.

The reasoning of the learned judge is different from that upon which Mr. Evershed relied. He said: "It is perfectly clear that it is an implied term of this agreement that the

Southern Company will not use whatever powers it may have to cause them to do something to the other party to the agreement which will prevent his being managing director."

However legitimate such an implication may be in the case of an ordinary service agreement, there is, in my judgment, no justification for it in the case of an agreement appointing a managing director. The implication of terms in contracts is only permissible within the strictest limits. In the present case it is, in my opinion, quite impossible to say that the parties must have intended what the learned judge suggests. The dependence of the tenure of office of a managing director upon his continuance in office as a director is so familiar, and the cases where, for intelligible business reasons, managing directors remain liable to powers of dismissal from their directorships are so commonly met with in practice, that no inference ought to be drawn as to the manner in which the parties to any particular agreement would have regarded the matter. The present agreement may have turned out to be a foolish one, in that it made no provision for security of tenure such as the respondent seeks to discover in it. On the other hand, the parties may have been satisfied with the reasonable business expectation that neither party to the agreement would wish to bring it to a premature end, the company by dismissing the respondent from his directorship or the respondent by resigning it. For all we can tell, the question of security of tenure in the office of director was fully discussed and no agreement come to upon it. On the other hand, the parties may have deliberately abstained from raising what might have turned out to be a controversial subject. None of these possibilities can be excluded.

I do not forget the familiar principle laid down by Cockburn C.J. in Stirling v. Maitland (1), where he said(2): "If a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be

(1) 5 B. & S. 840.

(2) Ibid. 852.

operative." This is no rigid rule, but, like all rules relating to the construction of written instruments, its application must depend upon the true interpretation of the instrument taken as a whole when considered in the light of its own particular subject-matter.

As I have said, I do not think that in this particular agreement such an implication ought to be made, when its effect would be to create obligations to serve and accept service in an employment different and distinct from that with which the agreement expressly deals.

For these reasons I would allow the appeal; but as my brethren take a different view on this point, I must express my opinion upon the two remaining matters in the case.

I am unable to accept Mr. Radcliffe's second argument upon the question of liability. If, as I here assume to be the case, I am wrong upon the first argument and there is to be found in the agreement an undertaking by Southern not by their own act to bring about the termination of the respondent's tenure of office as director, it appears to me that this undertaking was broken when Federated, armed with a power placed in its hands by the act of Southern in altering its articles, removed the respondent from that office. The act of Southern was an indispensable step in the process of removal.

The remaining matter relates to damages. The criticisms directed to the manner in which Humphreys J. arrived at the figure which he awarded are of a quite minor character and I do not propose to discuss them in detail. It is sufficient to say that there is not in any of them any such real substance as would justify us in interfering with the judgment in this respect.

Having regard to the view taken by the majority of the Court, the appeal must be dismissed with costs.

MACKINNON L.J. I think that this appeal fails.

The question involved is the construction of the contract of December 21, 1933, and whether the termination of Mr. Shirlaw's position as a director of Southern Foundries (1926), Ld., constituted a breach of that contract.

If the articles of association as they existed on December 21, 1933, had remained unaltered on March 27, 1937, and the company had purported under art. 105 to remove Mr. Shirlaw from his position as a director by extraordinary resolution, they would clearly have committed a breach of the contract of December 21, 1933. Indeed, I am not sure that such action under art. 105 would not have been ultra vires, for art. 91, which provides that a managing director shall be subject to the same provisions as to removal and resignation as the other directors, stipulates that this shall be "subject to the provisions of any contract between him and the company." As the contract of December 21, 1933, expressly provided that he should be and remain managing director for ten years, I think that this suspended or removed during that time any power of the company to remove him from being a director under art. 105 and equally his right to resign under art. 89. If, therefore, these articles had remained in force in March, 1937, there would have been a breach of the express terms of the contract and there would have been no necessity to consider any implied term in it.

In fact, however, the Southern Company by special resolution of April 17, 1936, adopted an entirely new set of articles. By No. 8 of these, Federated Foundries, Ld., were given the power to remove from office any director of the Southern Company. Then No. 68 of the Table A provisions annexed, providing for the appointment of a managing director, made such appointment "subject to determination if he ceases from any cause to be a director" and made no reference to the qualification "subject to the provisions of any contract between him and the company" that had existed in the old art. 91.

On March 25, 1937, pursuant to the new art. No. 8, Federated Foundries exercised their power to remove Mr. Shirlaw from being a director of the Southern Company. Upon receipt of this mandate on March 27 he ceased to be a director and ipso facto under No. 68 of Table A his appointment as managing director was terminated.

The question is whether this termination was a breach by

the Southern Company of the agreement of December 21, 1933, caused or procured by the Federated Company.

I think that Humphreys J. was right in holding that it was, for, as by the contract and the then existing articles, the company had no right to remove Mr. Shirlaw from being a director during the ten years, I think it was an implied term that they would not by any alteration of the articles create such a right and exercise it during that period.

I recognize that the right or duty of a Court to find the existence of an implied term or implied terms in a written contract is a matter to be exercised with care; and a Court is too often invited to do so upon vague and uncertain grounds. Too often also such an invitation is backed by the citation of a sentence or two from the judgment of Bowen L.J. in The Moorcock. (1) They are sentences from an extempore judgment as sound and sensible as all the utterances of that great judge; but I fancy that he would have been rather surprised if he could have foreseen that these general remarks of his would come to be a favourite citation of a supposed principle of law, and I even think that he might sympathize with the occasional impatience of his successors when The Moorcock (1) is so often flushed for them in that guise.

For my part, I think that there is a test that may be at least as useful as such generalities. If I may quote from an essay which I wrote some years ago, I then said: "Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, 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!'"

At least it is true, I think, that, if a term were never implied by a judge unless it could pass that test, he could not be held to be wrong.

Applying that in this case, I ask myself what would have happened if, when this contract had been drafted and was awaiting signature, a third party reading the draft had said:

(1) (1889) 14 P. D. 64.

"Would it not be well to put in a provision that the company shall not exercise or create any right to remove Mr. Shirlaw from his directorship, and he have no right to resign his directorship?" I am satisfied that they would both have assented to this as implied already, and agreed to its expression for greater certainty. Mr. Shirlaw would certainly have said: "Of course that is implied. If I am to be bound by this agreement, including the barring of my activities under clauses 11 and 12 when I cease to be managing director, obviously the company must not have, or create, the power to remove me at any moment from the Board and so disqualify me from that post"; and the company, which must be presumed to have been then desirous of binding him to serve them as managing director for ten years, would, I think, with equal alacrity have said: "Of course that is implied. If you were tempted by some offer elsewhere, it would be monstrous for you to be able to resign your directorship and, by so disqualifying yourself from being managing director, put an end to this agreement."

In the result, I think that the learned judge came to a right decision and this appeal fails.

On the question of the amount of damages, I have nothing to add.

GODDARD L.J. I agree with MacKinnon L.J. that this appeal should be dismissed.

I deal first with what the position would have been had the articles of association remained as they were at the time the contract was entered into. By art. 90 the directors had power to appoint one of their body to be managing director for such period and upon such terms as they thought fit. It is conceded, as it must be, that, if the person so appointed ceased to be a director, his appointment as managing director would lapse; so by art. 91 it is provided that the managing director shall not have to retire in rotation. It is provided also that he is to be subject to the same provisions as to resignation and retirement as the other directors, but that

this is to be subject to the provisions of any contract between him and the company.

The contract itself admits of no doubt as to its meaning and effect. The company agrees to employ the plaintiff and he agrees to serve them as managing director for ten years. He, therefore, cannot resign during that period so as to deprive them of his services; nor can they remove him under art. 105, because by so doing they would by their own act defeat the provisions of the contract that they have made and which they had power to make to employ him for ten years.

No question arises in this case as to the provisions of art. 89, but wholly different considerations would apply were that article in question. Were the plaintiff, for instance, to purport to give notice of resignation and then refuse to act as a director, or if he parted with his qualification, it may well be that he would vacate his office; but he would be liable to the company in damages for having, by so doing, broken the contract whereby he agreed to serve as managing director.

In my opinion it is clear that under the original articles the company had no power to remove the plaintiff under art. 105, having regard to the provisions of the agreement.

It is said that Southern Foundries never did remove the plaintiff from his office. What happened was that in April, 1936, the company amended or rather entirely altered its articles, and the new articles gave power to Federated Foundries, Ld., the second defendants, to remove any director of the Southern Company, and also provided that an appointment as managing director should determine if he ceased from any cause to be a director. It was in fact Federated Foundries who purported to remove the plaintiff from office. Granted that a company cannot be deprived of its right to alter its articles, it seems to me to be wrong to say that by an alteration the company can put it into the power of some one else to do that in relation to an existing contract that it could not itself do. If it is said that it is impossible for them to continue the employment of the plaintiff, one answer seems to me to be that the impossibility is of their own creation. Further, I think it must be an implied term of the contract

that the company would not so alter their articles as to put it in the power of themselves or any one else to determine the contract. When one considers that not only was the plaintiff bound to serve the company for ten years, but he was put under restrictive covenants of some severity to take effect at the termination of the contract, it seems to me against all reason to say that the parties could have intended anything except that nothing should be done by them during the currency of the agreement which would prevent or disable the plaintiff from serving out his time.

In my opinion Humphreys J. was well justified in making the implication that he did.

As to damages, I see no reason whatever for holding that they are in any respect excessive; so that this ground of appeal also fails.

Solicitors: Allen & Overy; Slaughter & May.

H. C. G.