Aberdeen Railway Company v. Blakie, Brothers

Factual and Procedural Background

Company B (iron-founders) sued Company A (a railway company) in the Court of Session, seeking either specific performance or damages under an alleged contract dated February 1846. Under that contract Company B was to supply a large quantity of iron chairs at £8 10s per ton for use on the railway. Company B delivered 2,710 tons but Company A refused to accept the remaining 1,440 tons.

The defence asserted that “Director A,” the managing partner of Company B, was simultaneously Chairman of the Board of Company A when the contract was made. Company A contended that this dual role created a disabling conflict of interest that rendered the contract void. The Court of Session rejected that view, settled an issue for jury trial, and by Interlocutor of 15 November 1851 declined to treat the conflict as a bar. Company A appealed to the House of Lords.

Legal Issues Presented

1. Whether a director of a railway company occupies a fiduciary position equivalent to that of a trustee so as to prevent him, while in office, from contracting on behalf of the company with himself or with a firm in which he is a partner.
2. Whether the pleadings, which relied on the Companies’ Clauses Consolidation Act, were nevertheless sufficient to raise the broader equitable defence of fiduciary conflict of interest.
3. Whether the relevant sections of the Companies’ Clauses Consolidation Act merely vacate the director’s office or also validate (or invalidate) the impugned contract.

Arguments of the Parties

Appellant (Company A) Arguments

• A company director is a trustee; therefore any contract he concludes on the company’s behalf with himself or his firm is voidable at the company’s instance, regardless of fairness.
• The third plea, although framed with reference to statute, adequately pleaded the material facts—namely the director’s conflicting interest—so the Court was bound to apply the equitable rule.
• The Companies’ Clauses Consolidation Act cannot be construed to authorise what equity forbids; at most it provides that a conflicted director forfeits office.
• No amount of shareholder ratification, homologation, or acquiescence can cure the inherent conflict.

Respondent (Company B) Arguments

• The defence relied exclusively on statute; because the statute does not declare such contracts void, the Court of Session correctly allowed the claim to proceed.
• Under Scots law a partner may contract with a company of which he is a director; the statute merely imposes a penalty (loss of office) but does not avoid the bargain.
• Even in English law conflicted contracts are not automatically null; fairness may still be shown in the absence of bankruptcy.
• Company A’s shareholders had long acquiesced in the arrangement, and the Appellants were barred by homologation.

Table of Precedents Cited

Court's Reasoning and Analysis

Judge [Cranworth] (Lord Chancellor) delivered the principal opinion. The Court held that:

• Directors act as agents with fiduciary duties identical in principle to trustees. A director must therefore not place his personal interest in conflict with his duty to the company.
• The third plea, though referencing the statute, pleaded all material facts necessary to raise the equitable defence; the Court is obliged to apply the correct law to those facts, striking out only the superfluous statutory words if needed.
• The equitable rule is so inflexible that no inquiry into the fairness of the bargain is permitted; the subject-matter (land or goods) is immaterial.
• Both English and Scots law derive the rule from Roman-law principles; there is no divergence between the systems.
• The modification of terms in June 1846 did not cleanse the original taint because it was merely a variation of an already-tainted agreement, not a fresh bargain negotiated at arm’s length.
• The Companies’ Clauses Consolidation Act does not validate conflicted contracts; it simply removes the director from office. Equity remains free to declare the contract unenforceable.

Judge [Brougham] concurred, emphasising the absence of any substantive difference between English and Scottish jurisprudence on fiduciary conflicts and commenting on the practical difficulties produced by the separation of law and equity in England.

Holding and Implications

HELD: The Interlocutor of the Court of Session dated 15 November 1851 is reversed; the third plea constitutes a complete defence, and Company A is assoilzied (absolved) from Company B’s action. No costs were awarded in the House of Lords.

Implications: The judgment definitively aligns Scots law with English equitable doctrine, confirming that company directors are fiduciaries subject to an absolute bar on self-dealing. The decision underscores that statutory provisions removing a conflicted director do not validate the underlying contract. Although important for corporate governance, the ruling sets no new precedent; rather, it reinforces a long-standing equitable principle now expressly applied to corporate directors in Scotland.