Erlanger v New Sombrero Phosphate Co
Encyclopedia
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 is a landmark English contract law
, restitution
and UK company law case. It concerned rescission for misrepresentation and how the impossibility of counter restitution may be a bar to rescission. It is also an important illustration of how promoters of a company stand in a fiduciary relationship to subscribers.
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.
Lord Blackburn
decided that delay did not bar rescission. As a general "condition to a rescission there must be a restitutio in integrum
." There was a question over this, since phosphate had been mined, and it was not so easy to put the phosphate back. He observed it would "be obviously unjust that a person who has been in possession of property under the contract which he seeks to repudiate should be allowed to throw that back on the other party’s hands without accounting for any benefit he may have derived from the use of the property… [or] making compensation for that deterioration." In this case, however, adequate compensate could be paid. So there was no impossibility in counter restitution. His judgment ran as follows.
Lord Penzance, Lord Hatherley, Lord O'Hagan, Lord Selborne and Lord Gordon concurred.
American cases
English contract law
English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
, restitution
Restitution
The law of restitution is the law of gains-based recovery. It is to be contrasted with the law of compensation, which is the law of loss-based recovery. Obligations to make restitution and obligations to pay compensation are each a type of legal response to events in the real world. When a court...
and UK company law case. It concerned rescission for misrepresentation and how the impossibility of counter restitution may be a bar to rescission. It is also an important illustration of how promoters of a company stand in a fiduciary relationship to subscribers.
Facts
Emile Erlanger was a Parisian banker. He bought the lease of the AnguillaAnguilla
Anguilla is a British overseas territory and overseas territory of the European Union in the Caribbean. It is one of the most northerly of the Leeward Islands in the Lesser Antilles, lying east of Puerto Rico and the Virgin Islands and directly north of Saint Martin...
island of Sombrero
Sombrero
Sombrero in English refers to a type of wide-brimmed hat originating in Mexico. In Spanish, however, it is the generic word for "hat", which originates from "sombra", meaning "shade"....
for phosphate
Phosphate
A phosphate, an inorganic chemical, is a salt of phosphoric acid. In organic chemistry, a phosphate, or organophosphate, is an ester of phosphoric acid. Organic phosphates are important in biochemistry and biogeochemistry or ecology. Inorganic phosphates are mined to obtain phosphorus for use in...
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
Lord Mayor of London
The Right Honourable Lord Mayor of London is the legal title for the Mayor of the City of London Corporation. The Lord Mayor of London is to be distinguished from the Mayor of London; the former is an officer only of the City of London, while the Mayor of London is the Mayor of Greater London and...
, 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.
Judgment
The House of Lords unanimously held that promoters of a company stand in a fiduciary relationship to investors, meaning they have a duty of disclosure. Further, they held, by majority (Lord Cairns LC dissenting), that the contract could be rescinded, and that rescission was not barred by laches.Lord Blackburn
Lord Blackburn
Lord Blackburn may refer to*Colin Blackburn, Baron Blackburn *John Morley, 1st Viscount Morley of Blackburn *Adam Patel, Baron Patel of Blackburn...
decided that delay did not bar rescission. As a general "condition to a rescission there must be a restitutio in integrum
Restitutio in integrum
Restitutio in integrum is a Latin maxim which means restoration to original condition. It is one of the primary guiding principles behind the awarding of damages in common law negligence claims...
." There was a question over this, since phosphate had been mined, and it was not so easy to put the phosphate back. He observed it would "be obviously unjust that a person who has been in possession of property under the contract which he seeks to repudiate should be allowed to throw that back on the other party’s hands without accounting for any benefit he may have derived from the use of the property… [or] making compensation for that deterioration." In this case, however, adequate compensate could be paid. So there was no impossibility in counter restitution. His judgment ran as follows.
Lord Penzance, Lord Hatherley, Lord O'Hagan, Lord Selborne and Lord Gordon concurred.
See also
- English unjust enrichment
- Lambert v Co-operative Insurance Society LtdLambert v Co-operative Insurance Society LtdLambert v Co-operative Insurance Society Ltd [1975] 2 Lloyd’s Rep 485 is an English contract law case, concerning misrepresentation. It is an example of the operation of a positive duty of good faith in contracts for insurance.-Facts:...
[1975] 2 Lloyd’s Rep 485 - Halpern v Halpern [2007] EWCA Civ 291
American cases
- Old Dominion Cooper Co v. Bigelow 188 Mass 315, 74 NE 653 (1905) a Massachusetts case holding promoters were fiduciaries because before the promoted corporation comes into existence, those future shareholders have no "independent representation".
- Smith v. BollesSmith v. BollesSmith v. Bolles, , was an action to recover out-of-pocket damages for alleged fraudulent representations in the sale of shares of mining stock. The plaintiff was denied benefit of the bargain damages. The case is important in contract law, specifically legal remedies and compensating...
, 132 U.S. 125 (1889) damages for misrepresentation of share sale did not entitle the buyer to get money as if the representation were true