Shirlaw v Southern Foundries (1926) Ltd  2 KB 206
Whether implied term of contract that director not be removed during fixed term
Shirlaw was appointed managing director of Southern Foundries (SF) for a fixed term of ten years. SF was taken over by another company who altered the pre-existing articles of association empowering two directors and a secretary to remove a director, irrespective of the terms of his contract. Shirlaw was sacked prior to the expiration of the fixed term, and he brought a claim to recover damages for breach of contract.
The company contended they were empowered to amend their articles of association under s10 Companies Act 1929. The new articles had been appropriately adopted, and the new procedures correctly followed. Given the statutory right to alter articles, it would be inappropriate for a court to interfere with the company’s right to do so. Shirlaw argued his employment contract was for a fixed term of 10 years, and the articles could not amend that contract. He argued there was an implied term of the contract that the company would not amend its articles in a way which would be detrimental to him.
Shirlaw successfully recovered damages for breach of contract. It was an implied term of his employment contract that he would not be removed from his role during the fixed ten year period. The company could not be prevented from altering its articles of association, but it may be liable in damages if it amends the articles so as to prejudice a contract validly made prior to the amendments.