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ERLANGER V. NEW SOMBRERO PHOSPHATE CO. (1878) 3 AC 1218: (1874-80) ALL ER REP. 271

ERLANGER V. NEW SOMBRERO PHOSPHATE CO. (1878) 3 AC 1218: (1874-80) ALL ER REP. 271

                                               

FACTS

  • Frédéric Émile d'Erlanger was a Parisian banker. He bought the lease of the Anguilla island of Sombrero for phosphate mining for £55,000. He then set up the New Sombrero Phosphate Co.
  • Eight days after incorporation, he sold the island to the company for £110,000 through a nominee. One of the directors was the Lord Mayor of London, who himself was independent of the syndicate that formed the company. Two other directors were abroad, and the others were mere puppet directors of Erlanger.
  • The board, which was effectively Erlanger, ratified the sale of the lease. Erlanger, through promotion and advertising, got many members of the public to invest in the company.
  • After eight months, the public investors found out the fact that Erlanger (and his syndicate) had bought the island at half the price the company (now with their money) had paid for it. The New Sombrero Phosphate Co sued for rescission based on non-disclosure, if they gave back the mine and an account of profits, or for the difference.
  • In June 1872, during a general shareholders' meeting, the rumours surrounding the purchase became more pronounced, prompting the establishment of an investigative committee. Upon receiving the committee's report in August 1872, the original directors were ousted at a public meeting, and new directors were appointed with the authority to take action in the company's interest.
  • The new directors engaged in discussions with the island's vendors, but these negotiations proved unfruitful. As a result, in December 1872, a lawsuit was filed to annul the contract.

ISSUES

  • Whether or not the contract can sustain? Whether the terms on which the Court of Appeal has set aside the contract are fair and equitable?
  • Whether the contract has been challenged in due time or whether there has been such laches on the part of the company so as to prevent their now demanding the rescission of the contract?

 

HELD
After very careful consideration, the court was of the opinion that the company has not lost its right of challenge. The onus lay on the appellants of showing that there had been such laches on the part of the company as to deprive it of the right to set aside the contract. The appellants failed to show that there had been such laches on the part of the company. Therefore, the court opined that the judgement appealed against is right, and should be affirmed.

  • LORD CAIRNS, L.C. – They stand, in my opinion, undoubtedly in a fiduciary position. They have had in their hands the creation and moulding of the company; they have the power of defining how, and when, and in what shape, and under what supervision it shall start into existence and commence to act as a trading corporation. I am of the opinion that it would be contrary to the principles of equity to give to the company the relief which at an earlier period they might have obtained.
  • The business of promotion thus gives a very advantageous position to the promoter in relation to the proposed company. The courts have, therefore, fixed him with the responsibility of a fiduciary agent. The promoter is in the situation akin to that of a trustee of the company, and his dealings with it must be open and fair.
  • Erlanger is guilty of breach of trust if he sells property to the company without informing the company that the property belongs to him or he may commit a breach of trust by accepting a bonus or commission from a person who sells property to the company.
  • The disclosure should be made to an independent and competent Board of directors.

 

COMMENTARY
“The first and the foremost duty of a promoter is that if he starts a company for the purpose of buying his property and wants to draw his payment from the money obtained from shareholders, he must faithfully disclose all facts relating to the property. If he conceals any fact in relation to the character or value of the property, or his personal interest in the proposed sale, the company will be entitled to set aside the transaction or recover compensation for its loss. He is guilty of breach of trust if he sells property to the company without informing the company that the property belongs to him or he may commit a breach of trust by accepting a bonus or commission from a person who sells property to the company. In short, the chief duty of the promoter as a fiduciary agent is to disclose to the company his position, his profit and his interest in the property which is the subject of purchase or sale by the company.”