Shirlaw v Southern Foundries Ltd [1940] AC 701 (HL)

Facts

• Shirlaw was appointed managing director of Southern Foundries Ltd for a fixed term of ten years.
• After his appointment, Southern Foundries was taken over by Federated, another company.
• Federated amended Southern Foundries' articles of association to permit removal of a director by the vote of two directors and a secretary.
• Using this new power, Federated removed Shirlaw from his directorship.
• As only a director could serve as managing director under the company's structure, this removal automatically terminated Shirlaw's position as managing director before the expiration of the agreed ten-year term.
• The dispute centered on whether the actions taken under the altered articles constituted a breach of Shirlaw's contract by rendering his continued employment impossible.

Issues

1. Whether there was an implied term in Shirlaw’s employment contract preventing the company from taking steps to remove him as director during his fixed term as managing director.
2. Whether Southern Foundries, by exercising its statutory right to alter its articles and acting under those altered articles to remove Shirlaw, thereby breached its contractual obligations.
3. Whether the alteration and its subsequent use could override pre-existing contractual arrangements.

Decision

• The court found in favour of Shirlaw, holding that Southern Foundries was liable for breach of contract.
• It was determined that while amending the articles was not itself a breach, the company’s subsequent action to remove Shirlaw as director (thereby ending his role as managing director) did breach an implied term of his contract.
• The court affirmed that a party must not act "of his own motion" to render contractual performance impossible, as articulated in Stirling v Maitland and Mackay v Dick.
• The fact that the company’s statutory powers under the Companies Act 1929 were exercised did not absolve the company from liability for breach of its contractual obligations.

Legal Principles

• Contracts may include implied terms necessary for their effective operation and reflecting the presumed intention of the parties.
• An implied term will not be recognized if it contradicts an express contractual provision.
• A party to a contract cannot, by their own voluntary actions, frustrate the performance of that contract (the "officious bystander" test for obviousness applies).
• A company’s statutory right to alter its articles of association is limited by existing contractual obligations; exercise of those powers cannot operate to defeat prior contracts.
• Actions taken under amended articles that impede prior contractual arrangements can amount to a breach of contract.
• The judgments relied on principles established in earlier cases, notably Stirling v Maitland and Mackay v Dick, regarding preventing contractual performance.

Conclusion

Shirlaw v Southern Foundries established that a company may be liable for breach of contract if it takes steps under altered articles of association to frustrate the performance of a pre-existing employment contract. The case clarifies the scope of implied terms and the limits of a company’s statutory powers when those powers conflict with contractual duties.