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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Laughland v Miller [1904] ScotCS CSIH_3 (19 February 1904)
URL: http://www.bailii.org/scot/cases/ScotCS/1904/1904_6_F_413.html
Cite as: [1904] ScotCS CSIH_3, (1904) 11 SLT 713, (1904) 6 F 413

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JISCBAILII_CASE_SCOT_COMPANY LAW

19 February 1904

Laughland
v.
Millar, Laughland, & Co.

Lord Adam.—(After giving a summary of the statements in the condescendence)—Mr Home maintained that the minute of meeting dated 3d April 1902 amounted to a ratification of the transaction contained in the agreement of 11th March. But I do not think it is anything of the sort. The matter was brought before the shareholders, and all they said was, “We shall let things stand as they are; we will allow that arrangement by which we have decided that the defenders were to get £700 for their labours to stand, and you and the pursuer must settle between you as you like.” They do not ratify anything. All they say is, we will not interfere. I do not consider that is a ratification of the agreement come to between the pursuer and the defenders as to the division of this surplus on the 11th of March. Well, then, if it is not a ratification of that agreement what are we to do? The pursuer says this in article 10 of this condescendence, and I do not think it is ambiguous at all—“If the whole balance of £1200 had been distributed among the shareholders (and the pursuer could have insisted on that being done) the share falling to the pursuer in proportion to his holding in the Company would have been £120 or thereby, and but for the arrangement narrated in article 7th he would have insisted on the distribution of the entire balance among the shareholders.” That is what is said. It means this—that here is a director of the Company, in that capacity, agreeing with the managers that they shall agree together to get from the Company a certain sum of money, £700, and that he, the director, and the managers shall divide that between them in a certain proportion. The pursuer tells us himself that if that agreement was not carried out—if he was not to get his share of this £700—he would have done what it was his duty to do, namely, to have this sum divided among the shareholders. In other words, he said—“I insist for my own interest, for the purpose of getting £200, that you shall get this whole sum, which otherwise I would have insisted should go to the shareholders.”

That is the case, and that brings us back to this: Was this a corrupt agreement by a director with the managers? I do not think it is anything else but a corrupt agreement. It is a combination between the managers and the director of this Company to get into their possession a sum belonging to the shareholders. That is the nature of the transaction, and if that is the nature of the transaction the question is, can such a corrupt agreement be sued upon? If it cannot be sued upon it is no answer to say, Oh, the Company is now extinct and they cannot recover the money. That is not the question we have to deal with at all. It is whether one of two parties who entered into such an agreement can sue the other upon it. That is the question, and my humble opinion is that a corrupt agreement such as this is cannot be sued upon. Just put it the other way. If the pursuer had got the money into his hand, then I do not think the defenders, if they had sued him for it, could have recovered from him any more than he can recover from them. I am therefore of opinion that the appeal should be sustained and the action should be dismissed, on the ground that the condescendence discloses a corrupt agreement which cannot be sued upon.

Lord M'Laren.—If we looked in this case only at the agreement I should have had some difficulty in coming to the conclusion that it was corrupt, because it merely purports to be a payment of a certain sum on a contingency. But then it is explained in cond. 10 that while the pursuer does not admit all that is said by the defenders as to the means of inducing this agreement, he does admit, and indeed asserts, that his inducement, or his mode of obtaining the agreement, was that if Millar & Laughland had not agreed to pay him £200 he would have used his influence as a director of the Company against the vote of this sum and in favour of the division of the whole £1200 among the shareholders. Now, if Mr David Laughland had of his own accord, and without making a bargain with anyone, gone to a meeting of the Company and supported the proposal for dividing the £1200 amongst the shareholders he would have been perfectly within his rights, because there was no legal obligation to pay Millar & Laughland, the managers, anything more than their stipulated salary and commission. But just because he would be within his rights in making such a proposal, I think it is plain that the bargain he made was illegal, because he says, “I am prepared to use my undoubted legal rights to promote my interest and that of the shareholders, but if you will allow me, as you invite me, to sacrifice the interests of the Company, and to vote you £700 to which you have no right, you in return are to pay me £200.” That is the substance of the agreement in the light of the facts stated in cond. 10, and although the condescendence certainly does not admit the corrupt bargain, yet we are entitled to read it along with the agreement, and the effect of the two things—the averment and the agreement taken together—is to satisfy me, just as clearly as if we had a parole proof, that this was a corrupt agreement by a director not to press the interests of the shareholders as against the interests of Millar & Laughland in consideration of his receiving £200. Now, what might be the rights of the Company we are not concerned with, because the Company, on the facts being brought to their notice, decided that they would take no action in the matter. If they had chosen I cannot doubt that they might have set aside the agreement altogether and reconsidered the question of remunerating their managers. It may be that the shareholders considered that, while disapproving of this bargain, yet if they had to consider Millar & Laughland's claim on its merits they would give the £700, or it may be that, as the Company was being wound up, they did not want to embark on litigation; but I agree with Lord Adam that we are in no way concerned in this case with the action or inaction of the Company. The question is, these parties having made a corrupt bargain for profiting at the expense of the Company, whether one of these parties to the bargain can sue the other for its fulfilment. I am very clearly of opinion that the right of action in such a case does not exist. It is quite unnecessary to review the authorities, because there is no point in the law of contract which is more firmly established than that when a contract is open to the objection that it is either against public policy, or is a dishonest attempt to defraud a third person, then the one party cannot sue the other, but the property or fund in question must remain in its existing position. It follows therefore, in my opinion, that this action should be dismissed.

Lord Kinnear.—I quite agree with your Lordships. I think that the pursuer's condescendence discloses a contract for a corrupt consideration, and that such a contract is not enforceable in law. I think the nature of the agreement is quite clearly apparent upon the face of the memorandum itself, although I, of course, agree with what Lord M'Laren said, that if we had nothing before us but the memorandum we should not be able to construe it and determine whether it disclosed a corrupt motive or not, or what it disclosed, because its main terms are expressed merely in figures and in initials, and it is necessary that we should know the facts in order to construe it. But then the facts that enable us to construe it are set out quite clearly and candidly in the 7th article of the condescendence, which is the article that sets out the memorandum itself for the purpose of supporting the pursuer's claim, because in that article, after having previously explained that there had been an agreement for the purchase and sale of the Sunnyside Rivet Company's business, and that as the result of that agreement it had been found that there would be a balance of the price available for division among the shareholders after paying debts and expenses, he goes on to say that in that condition of matters he, on the 11th of March 1901, had a meeting with the defender Edward Millar, when the matter of the destination of the price was discussed, and the respective claims of the pursuer and defenders were debated. Now, the matter of the destination of the balance of the price was a matter for the shareholders, because it was their money, and I do not see that the defenders and the pursuer had any right or duty to enter into a contract about it at all. The pursuer's business was to advise the shareholders. (His Lordship then narrated the statement in the condescendence as to the terms of the agreement, and the money being voted by the shareholders.)—Now, if that statement had stood alone, I think, for my part, I should have very little difficulty in inferring that there was a bargain between these two parties for an illegal commission to the pursuer, but then he goes on and makes the matter perfectly clear by what he says in the 10th article of the condescendence. (His Lordship quoted the 10th article.)—Now, I agree with the observations of Lord Adam that this is not an ambiguous statement. It makes it perfectly clear, in the first place, that according to the pursuer's averments the defenders had no right at all to any part of this £1200, but that all of it was the money of the shareholders, and divisible among them, without a farthing of it going to the defenders. But then it is equally clear that that being, according to his statement, the position of their rights, he goes on to say,—“I would have insisted upon this way of dealing with the money and given the shareholders their own property had not I made an arrangement by which I was to get £200 out of it, and I preferred that arrangement to the effect of the natural and legal division which would have been made, because in the latter case I should only have got £120, and now I have £200, in addition to whatever share I may have in proportion to my holding”; and he goes on to say,—“I would have insisted upon a proper division if I had not made this agreement.” Now, I think that is about as clear a statement as can be of an illegal contract—a contract that is not enforceable. I observe upon it, further, that according to the pursuer's own statement, it was his plain and obvious duty, in bringing the matter before the shareholders, to tell them that if they paid £700 to the defenders there was an agreement between them and him that he was to get £200, and I think he is chargeable with a grave breach of duty when he says that he got that for himself and did not disclose it to the shareholders; and the conclusion that that was a grave breach of duty on his part appears to me to be illustrated very clearly by the statement in the last minute, to which the pursuer refers, that one of the shareholders, Mr Scobbie, wrote to the liquidator, and said,—“Until after the liquidation of the Company was closed I was not aware that Mr David Laughland had stipulated for any part of the bonus of £700 voted to Messrs Millar, Laughland, & Company. Had I known I certainly would have objected, and I now object to him obtaining any part of it, my consent being given on the distinct understanding that the bonus was for them only.” I do not desire to found upon that as evidence, because we have no evidence before us, and we dispose of the case upon the pursuer's statement only, but the pursuer makes it part of his own statement, and it is a very clear illustration of what I think the prejudice done to the shareholders by conduct of this kind upon the part of a director really is, for what Mr Scobbie says he would have done is exactly what the law assumes that any shareholder would have been entitled to do, and probably would have done, in his own interest, if the matter had been brought before him. But I do not found upon that to the effect of disabling the pursuer from enforcing the contract, because that is a breach of duty to the shareholders after the agreement was made, and does not enter into the motive of the agreement itself. But then, on the other hand, it was the pursuer's conduct, in order to carry out, and, according to his own statement, for the purpose of carrying out the agreement he had made with the defenders, and so it throws light again upon the true meaning and illegal character of that agreement. I quite agree also with what has been said by both your Lordships, that there is no question here of any ratification by the shareholders of what was done after the facts were brought to their knowledge, because the minute founded upon as the ratification amounts to nothing more than this, that in the circumstances before them the shareholders did not require the liquidator to take action in the matter. That is the whole result of the minute, and that may be accounted for by reasons that have no connection at all with the notion of the shareholders being willing and ready to ratify what had been done if it required their ratification. It comes to nothing more than this, that in the circumstances in which the Company is they do not direct the liquidator to raise an action. The legal result, I agree with your Lordships, is perfectly clear, that a contract of this kind according to our law is ineffectual. It cannot be enforced, and the law to that effect is stated very clearly, not only by Mr Bell in his Principles, to which Mr M'Clure referred, but by Stair and Erskine, and by all the institutional writers. These writers, no doubt, give a number of illustrations of what they understand by a contract contra bonos mores, and I do not think there is to be found among them the case of a director of a joint stock company taking a commission to the prejudice of his shareholders, but that is only because cases of that kind had not arisen when either Stair or Erskine or Bell wrote so frequently as they have unhappily arisen now. The principle laid down by all these writers is as applicable to the case of a director of a joint stock company as is the decision of the Queen's Bench in the case of Harrington. The question as to what may ultimately become of the money in the hands of the defenders is a question with which we have no concern. I do not consider whether the Company, if it had still existed, or members of the Company which has now ceased to exist, will have any claim or right of action against the defenders. We have nothing to do with that, but I think it clear that the pursuer has alleged a contract which he has no right in law to enforce against anybody.

The LORD PRESIDENT was absent.

6 F 413

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was granted by Scottish Council of Law Reporting and
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