Southern Foundries Ltd v Shirlaw [1940]

Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 is notable in contract law case establishing the officious bystander test. The case is also noteworthy in company law as it establishes the principle that damages can be sought for breach of contract by a director, even when the contract appears to limit the company's power to terminate employment through its constitution.

Mr Shirlaw, the managing director of Southern Foundries Ltd, was removed from his position by the company after a change in its articles empowered certain individuals to do so. This change occurred after another company, Federated Foundries Ltd, took over Southern Foundries. Mr Shirlaw, whose contract stipulated a tenure of ten years, sued Southern Foundries for breach of contract.

The High Court awarded £12,000 in damages to Mr Shirlaw for the breach of contract. The Court of Appeal held that it was implied in the contract that the company would not remove Mr Shirlaw from his directorship during his tenure. They also concluded that altering the articles to enable removal was a breach of contract, affirming the damages awarded by the High Court. The Court of Appeal decision is famous for MacKinnon LJ's formulation of the officious bystander test. According to this test, a term should be implied in a contract if it is so obvious that both parties would have agreed to it if suggested by an officious bystander during the contract's formation.

The House of Lords upheld the Court of Appeal's decision, emphasising that the change in articles constituted a breach of contract. Lord Atkin, delivering the leading judgment, highlighted the contractual obligation for Southern Foundries to ensure Mr Shirlaw's continued directorship during the agreed ten-year term.

Lord Atkin's judgment clarified that the company's power to dismiss, as outlined in the articles, should be distinguished from the right to dismiss without just cause. The contract, in this case, effectively guaranteed Mr Shirlaw a ten-year tenure, subject to explicit exceptions. The House of Lords rejected the argument that a company could not guarantee a director's ten-year tenure, emphasising that the contractual agreement implied the company's commitment to maintaining Mr Shirlaw in his role.

The decision is significant for contract law, establishing the principle that the officious bystander test can be a useful tool in determining implied terms in contracts. Moreover, it reinforces the idea that companies can be held liable for damages if they breach contracts, even if such breaches involve changes to the company's constitution. The decision underscores the importance of upholding the terms of a contract and the implied duties that accompany it.
Back to blog

UOL Case Bank

Upon joining, you become a valuable UOL student and gain instant access to over 2,100 case summaries. UOL Case Bank is constantly expanding. Speed up your revision with us now.

Subscribe Now

Where are our students from?

Yale University
Council of Europe
Baker Mckenzie 
University of Chicago
Columbia University
New York University
University of Michigan 
INSEAD
University College London (UCL)
London School of Economics (LSE)
King’s College London (KCL)
University of London
University of Manchester
University of Zurich
University of York
Brandeis University
University of Exeter
University of Sheffield
Boston University
University of Washington
University of Leeds
University of Law
Royal Holloway, University of London 
Birkbeck, University of London
SOAS, University of London
University of Kent
University of Hull
Queen’s University Belfast
Toronto Metropolitan University
Hong Kong University of Science and Technology
University of Buckingham

  • Criminal Practice

    Diagrams and Charts

    Our carefully designed diagrams and charts will guide you through complex legal issues.

  • Criminal Law

    Clear and Succinct Definitions

    Key concepts are concisely defined to help you understand legal topics quickly.

  • Property Law

    Statutory Provisions

    Statutory provisions are provided side by side with legal concepts to help you swiftly locate the relevant legislation.

  • Public Law

    Case Summaries

    We have summarised important cases for you so that you don't need to read long and boring cases.

  • Evidence

    Rules and Exceptions

    Rules and exceptions are clearly listed so that you know when a rule applies and when it doesn't.

  • Company Law

    Terminology

    Legal terms and key concepts are explained at the beginning of each chapter to help you learn efficiently.

  • Case Law

    Case law is provided side by side with legal concepts so that you know how legal principles and precedents were established.

  • Law Exam Guide

    Law Essay Guide

    You will learn essential law exam skills and essay writing techniques that are not taught in class.

  • Law Exam Guide

    Problem Question Guide

    We will show you how to answer problem questions step by step to achieve first-class results.

  • Conflict of Laws

    Structured Explanations

    Complex legal concepts are broken down into concise and digestible bullet point explanations.

  • Legal System and Method

    Legal Research

    You will learn legal research techniques with our study guide and become a proficient legal researcher.

  • Jurisprudence and Legal Theory

    Exam-focused

    All essential concepts, principles, and case law are included so that you can answer exam questions quickly.