Erlanger vs. New Sombrero Phosphate Co (1878) 

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Facts of the case 

In this instance, a group of individuals led by Erangler paid £55,000 for an island  which was site to a phosphate mine. Following that, Phosphate Co (Phosphate)  was established to manage the mines, and through a nominee, Sombrero’s lease  was sold to Phosphate for £110,000. The Lord Mayor of London, who was not a  member of Erlanger’s original group of founders, served as one of Phosphate’s  directors. Two additional directors were abroad ; the additional directors were  Erlanger puppet directors. The business was virtually an extension of Erlanger  because of its tight control over Phosphate. The lease’s sale was approved by  phosphate. Erlanger’s aptitude for promotion led to a large number of investments  in Phosphate. 

Phosphate sued Erlanger for recession owing to non-disclosure and an account  of profits when the investors realised that he had sold the lease to them for twice  what he had paid for it. 

Issue 

• Was Erlanger liable to Phosphate due to not disclosing to his conflict of  interest? 

Arguments and Rule: 

The company argued that Erangler is a promoter of the company as per Section  2(69) of the Company Act as per which a promoter is someone,  

• who has been named as such in a prospectus or is identified by the company  in the annual return referred to in section 92; 

• who has control over the affairs of the company, directly or indirectly  whether as a shareholder, director or otherwise;

• in accordance with whose advice, directions or instructions the Board of  Directors of the company is accustomed to act. 

Judgement 

The court held that Erlanger was a promoter of the company phosphate. The  House of Lords unanimously decided that a promoter’s relationship with a freshly  created firm qualifies as a fiduciary relationship. A promoter owes the company  obligations of honesty and good faith. Erlanger can’t make any “secret profits”  because he was required to disclose any competing interests to the corporation  that promoted him. Promoters who fail to inform the firm of conflicting interests  are in violation of any obligations they have to the business. The business has the  option to pursue remedies including contract cancellation and profit recovery. Additionally, a constructive trust may be established for any gains the promoter  received after failing to uphold their duties. 

The majority also ruled that the contract cannot be terminated (Lord Cairns LC  dissented). 

Lord Blackburn 

• Counter-restitution is justified by the requirement that the party seeking  rescission not also benefit unfairly. 

• The best course of action is to enable “practical justice” by using monetary  counter-restitution for benefits that cannot be returned directly rather than  insisting on precise specified counter-restitution. 

Citation 

(1878) 3 App Cas 1218

Written by Ridhima Mittal an intern under legal vidhiya.

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