Aberdeen Railway Co. versus Blaikie Bros, (1854) 1 Macq. 461

This case laid down a basic rule that if a director had an interest in a corporate transaction, the transaction is voidable at the company's will, and it is the duty of directors to avoid any possibility of a conflict of interest.
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Introduction

The case of Aberdeen Railway Co. was concerned with the principle of duty of loyalty in the Company Law, as well as the principle of not participating in self-dealing. The duties of directors in a company are ones of responsibility, and this case reiterated these two aforementioned duties – Firstly, that if a director is faced with a transaction where he/she has an ounce of self-interest, then in such a case, the transaction so concluded remains voidable at the will of the company. Secondly, the directors have the duty to remain aloof from any possible situation where there are chances that any potential conflict of interest may arise. However, the instant case presented a legal position which was later eradicated by the updated Companies Act in the year 2006. The new law brought the possibility that if there is a chance that any of the directors of the company had any interest in the transaction being done, then under Section 177 of the Companies Act, 2006, the director may declare to the board of directors about the interest before the proposed transaction. Also, Section 239 states that the director who is facing a conflict of interest, cannot vote in approving the transaction. These provisions later rendered the legal position established in this case moot. However, before the law came into force, the legal position greatly reiterated the duties of the directors from indulging in transactions where their self-interest was involved.

Facts of the Case

There was a contract entered into between Aberdeen Railways and Blaikie Bros. Aberdeen Railways, the plaintiff needed a large number of iron chairs (rail sockets) at the cost of 8 Pounds/Ton, to which the Blaikie Bros agreed. The contract was entered into for the duration of 18 months. The contract had been performed partly, and Blaikie Bros had provided Aberdeen railways with as much as two-thirds of the contracted amount of iron chairs. However, after that, Aberdeen Railways refused to accept any more of the iron chairs from Blaikie Bros. The Blaikie Bros filed a suit to enforce this contract which Aberdeen Railways refused to enforce. The argument put forth by the respondents i.e. Aberdeen Railways, was that the managing director of Aberdeen Railways at the time when the contract was made, Sir Thomas Blaikie, was also the Managing Director of the Blaikie Bros, which implied that there was a conflict of interest in the action.

Issues

The Court in Aberdeen Railway Co. was faced with the following issues –

  1. Whether there was any conflict of interest due to the position of Sir Thomas Blaikie?
  2. Whether the suit filed by Blaikie Bros for enforcement of the contract maintainable and are they entitled for any damages due to the breach of contract?

Held

The Court held that Aberdeen Railway Co. was not bound by any sort of contract which they had entered into with Blaikie Bros. The rationale presented by the Court behind this decision was that at the time when the contract had been entered into by Aberdeen Railways and Blaikie Bros, the Chairman of the Board of Directors of Aberdeen Railways was also the Managing Director of the Blaikie Bros. The Court opined that the self-interest of Sir Thomas Blaikie, the director in addition to self-interest in this contract would cause him to settle the terms of the deal to a level which delivers to him the maximum profit from the deal. The Court held that the rule in question i.e., the duty of the directors to not indulge in the transactions which pose a conflict of interest for them was clearly violated in this case, where the person holding important positions in the Boards of both the parties to the transaction, had clearly a personal interest in the enforcement of the contract.

Analysis

The Court considered several facets through which to consider the merits of the case. The Directors of a company are the representatives through whom any corporate body can act. They are also in charge of the management of the affairs of the company. This also puts them under the duty to act in a manner wherein the interests of the corporation on the behalf of which they are acting are secured and maximised, rather than indulging in securing their self-interests. They are under the obligation to discharge a fiduciary duty towards their principal. Mr. Blaikie was not only a director, but also a Chairman of the Board of Directors of the company, which imposed upon him a much severe duty to ensure and lookout for the best interests of the company, and thereby ensure that the company secured the best bargains when negotiating the transaction with the other parties, a duty at which he utterly failed. The Court opined that his motives to drive the company into a bargain which would promote his self-interest to the maximum was unjust of him, and thereby freed Aberdeen Railways from being bound by any terms of the contract so entered into.

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