Erlanger v New Sombrero Phosphate Co [1878]

Erlanger v New Sombrero Phosphate Co [1878]

Erlanger v New Sombrero Phosphate Co [1878] 3 App Cas 1218 is pivotal case concerning English contract law, restitution, and company law. The case revolves around rescission for misrepresentation and the potential bar due to the impossibility of counter-restitution. It also underscores the fiduciary relationship of promoters to subscribers in a company.

Frédéric Émile d'Erlanger, a Parisian banker, acquired the lease of Sombrero Island for £55,000, subsequently forming the New Sombrero Phosphate Co. Soon after incorporation, he sold the island to the company for £110,000 through a nominee. Key figures, including the Lord Mayor of London, had connections to Erlanger's syndicate, raising concerns about the fairness of the transaction. Public investors, attracted by Erlanger's promotion and advertising, later discovered the significant price difference.

The central legal issue involved the public investors' discovery that Erlanger had sold the island to the company at double the price he paid. The company sought rescission based on non-disclosure, aiming to return the mine and claim either an account of profits or the price difference.

The House of Lords unanimously established that promoters of a company owe a fiduciary duty to investors, necessitating a duty of disclosure. A majority held that rescission was permissible and not barred by laches. Lord Blackburn emphasised the importance of a restitutio in integrum as a condition for rescission, suggesting that compensation might suffice. The fiduciary relationship of promoters to the company obligated them to consider the company's interests during its formation.

This case established key legal principles, including the fiduciary duty of promoters to a company and the duty of disclosure. It clarified that rescission is not barred by laches if counter-restitution is not impossible. The burden of proof lies with fiduciary agents, who must demonstrate that purchasers were adequately protected or had sufficient reasons to believe in such protection.

This case remains influential in discussions of company law, particularly regarding the fiduciary responsibilities of those involved in forming and promoting companies. It serves as a reference point for understanding the delicate balance between the interests of promoters and those of the company, highlighting the need for transparency and fairness in such transactions.
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