DAIMLER CO., LTD. V. CONTINENTAL TYRE AND RUBBER CO. (GREAT BRITAIN), LTD., 1916 AC 307: (1916-17) ALL ER REP. 191
FACTS
- Respondent company, registered in London, initiated an action in October 1914 to recover certain debts. The company had a capital of £25,000 in £1 shares, with only one share held by a naturalised British subject and the rest held by Germans.
- Daimler purchased tyres from Continental Tyre and Rubber Co Ltd, but Daimler was hesitant to pay because doing so may violate both a proclamation and the common law crime of trading with the enemy. Due to the First World War, Daimler launched a lawsuit to see if payment could be made.
- When a company is formed for a specific purpose, it is anticipated that it will be impartial and independent from its owners; nevertheless, during times of war, this is not always the case, and the shareholders may exert influence over the firm’s decisions.
- The appellants did in fact, argued that trading with or paying money to alien enemies during the war was illegal, and that the respondent company was, in substance, an alien enemy. They also contended that the solicitors for the respondent company had no authority to issue the writ in the action.
ISSUES
- Whether trading with or paying money to alien enemies during the war is illegal, and if so, whether the respondent company can be considered an alien enemy?
- Whether the solicitors for the respondent company had authority to issue the writ in the action?
HELD
The Court ruled in favour of the appellants (Daimler Co. Ltd.). The appeal was allowed, all orders made in the case were discharged, and the action was struck out. The House of Lords determined that even though the firm is a separate artificial entity from its shareholders, it will take on an enemy character if its shareholders or controlling agents are citizens of an enemy nation.
- The Court held that it is illegal to trade with or pay money to alien enemies during the war. Despite the indirect means by which the respondent company sought to obtain its debts, the Court found that the object of these means was to enable payments to be made to the King's enemies, which is unlawful. While such means may be lawful in peacetime, they become unlawful when German traders are at war with the country.
- The Court also found that the solicitors for the respondent company had no authority to issue the writ in the action. The secretary of the company, who initiated the action, did not have the authority to do so, as there was no evidence that any power to institute actions or give receipts for money recovered was ever conferred upon the secretary. The action was therefore instituted without authority from the company.
- Because the secretary only owns one of the company’s 25000 shares, which are from England, and the rest are from Germany, the court strongly held that it is the responsibility of the company to demonstrate that the secretary was not acting on instructions from other shareholders from an enemy nation.
COMMENTARY
“Determination of character.—Occasionally it becomes necessary to determine the character of a company, for example, to see whether it is an "enemy". In such a case, the courts may in their discretion examine the character of persons in real control of the corporate affairs. The House of Lords laid down that a company incorporated in the UK is a legal entity, a creation of law with the status and capacity which the law confers. It is not a natural person with mind or conscience. It can be neither loyal nor disloyal. It can be neither friend nor enemy. But it may assume an enemy character when persons in defacto control of its affairs are residents in any enemy country or, wherever resident, are acting under the control of enemies. Accordingly the company was not allowed to proceed with the action. If the action had been allowed the company would have been used as a machinery by which the purpose of giving money to the enemy would be accomplished. That would be monstrous and against public policy. But where there is no such danger to public interest, the courts may refuse to tear open the corporate veil.”