#6881 - Erlanger V. New Sombrero Phosphate Company - Restitution of Unjust Enrichment BCL

Erlanger v. New Sombrero Phosphate Company

Facts

Purchase of the Lease of Mines by the syndicate: Sombrero is a small island in the West Indies , which was the property of the Crown, but had been leased out by the Crown for twenty-one years from March, 1865, at a rent of 1000 a year. The lease had been assigned to a company called “The Sombrero Company,” the business of which was to work the beds of phosphate of lime with which the island abounded. The company got into difficulties, and was ordered to be wound up; and the lease, constituting the most valuable part of the assets, was ordered to be sold. Mr. Chatteris was the official liquidator, and he fixed the price of 55,000 for it. The Appellants, together with one Thomas Westall, formed what was called a syndicate (in this instance meaning a special partnership), for the purpose of purchasing it. It was purchased at the price put on it by Mr. Chatteris , after the syndicate had offered, but in vain, a smaller price for it.

Syndicate purchase the mine through a company: Appellants having thus become the purchasers of the lease desired to sell it again and obtain a profit on the resale; and with that view to get up a company to purchase it and work the mines. A memorandum of association was prepared, and articles and a prospectus were also issued. The memorandum stated, in the usual way, the objects of the company, which were to purchase the lease and work the mines. The articles (among other things), stated that, in the first instance, the number of directors should not be less than four, nor more than seven, but that number might be changed at any general meeting. Two directors were to “form a quorum for the transaction of business.” The contract for the purchase by the company purported to be made between John Marsh Evans, as the vendor, and Francis Pavy , as the purchaser on behalf of the company. This contract recited the purchase by the syndicate of the 30th of August, but did not name the price then given. The price to the company was to be 110,000, of which 80,000 were to be paid down, and the remaining 30,000 to be satisfied by fully paid-up shares in the new company.

Claim against members of the Syndicate: New directors were accordingly appointed at a meeting of the 29th of August, 1872. A correspondence then ensued with Baron Erlanger and the other members of the syndicate. Baron Erlanger denied all legal liability, but offered to give the company the benefit of the full amount of profit which his firm derived in cash and shares from the transaction. The other members of the syndicate did not answer. On the 24th of December, 1872, the bill in this suit was filed against Erlanger, Evans, Dakin, Macdonald , and others (afterwards amended by the addition of all the members of the syndicate, and others representing interests therein), and prayed that the contract of the 20th of September, 1871, might be set aside; that such of the Defendants as were members of the syndicate might repay to the company the 110,000 with interest, the company delivering up the island and accounting for profits made by working it; or that the members of the syndicate might be ordered to repay the difference, 55,000, between the sum paid by the syndicate and that paid by the company.

Holding

Lord Penzance

Contract liable to be rescinded

Can a contract so obtained be allowed to stand? The bare statement of the facts is, I think, sufficient to condemn it. From that statement I invite your Lordships to draw two conclusions: first, that the company never had an opportunity of exercising, through independent directors, a fair and independent judgment upon the subject of this purchase; and, secondly, that this result was brought about by the conduct and contrivance of the vendors themselves. It was the vendors, in their character of promoters, who had the power and the opportunity of creating and forming the company in such a manner that with adequate disclosures of fact, an independent judgment on the company's behalf might have been formed. But instead of so doing they used that power and opportunity for the advancement of their own interests.

A contract of sale effected under such circumstances is, I conceive, upon principles of equity liable to be set aside.

Restitution possible despite delay

Delay, as it seems to me, has two aspects. Lapse of time may so change the condition of the thing sold, or bring about such a state of things that justice cannot be done by rescinding the contract subject to any amount of allowances or compensations. This is one aspect of delay, and it is in many cases particularly applicable to property of a mining character.

And so dealing with the facts of the present case, I find myself unable to conclude affirmatively that it has been made out by the argument at the Bar that either the character of the property, or the way in which the company had dealt with it, did in point of fact preclude the possibility of justice being worked out on the basis of the contract being rescinded. If the decree which has been made does not work out the justice of the case, it should have been pointed out in what respect it fails to do so, and either an amendment of it prayed, or the impossibility of such amendment clearly shewn.

Upon the whole, then, I am unable to satisfy myself, either that it is not practicable to do justice on the basis of the contract being rescinded, or that the company has by any laches or delay laid itself fairly open to the imputation of having acquiesced in the contract which they now seek to set aside.

Lord Cairns (dissenting on delay)

The part of the case which, however, has given me the most anxiety is the question whether, having regard to what was made known at the time that the company was formed, and to what became known, and to what also might farther have become known, shortly after it was formed, and having regard, farther, to the very peculiar nature of the property which had been purchased, and to the impossibility of restoring the parties to their original *1239 position, relief can or ought now, consistently with the principles of equity, to be given to those who seek to impeach the contract. On this question I have entertained, and still continue to entertain, considerable doubt, or more than doubt. The case has, however, been twice argued most elaborately and ably, and all of your Lordships are, I believe, of opinion that the company has not lost the right, which undoubtedly it had, to set aside the sale. I do not therefore think it necessary to do more than express generally the grounds of the doubts which on this part of the case I have felt.

The lease is one for the obtaining and putting on the market an article of commerce, the price of which is varying, uncertain, and speculative; outlay is required, the amount of which must vary with circumstances from time to time. Again, the company is aware that it is about to use the name of the...