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Erlanger v New sombrero Phosphate Co

[1878] 2 App Cas 1218, HL

Case summary last updated at 02/01/2020 15:10 by the Oxbridge Notes in-house law team.

Judgement for the case Erlanger v New sombrero Phosphate Co

D purchased a lease on a mine and then nominally sold it to a new company he set up of which he was a director and all the other directors were people clearly under his control. He then sold shares in the company to the investors, prices being based on the price at which D sold to his own company rather than the price at which he purchased. This was later discovered when the shareholders voted to sack all the directors and replace them with new ones, who sued D to rescind the sale of the island to the company and thereby entitling the shareholders to get their money back. HL said the contract could be rescinded. 
 
Lord Penzance: In fiduciary relationships such as trustee-trustor, principal-agent, father-son etc. the courts grant relief from “unfair advantage” and the party accused of being in the position of unfair advantage has the burden on him to show that he is not. On the question of whether the contract was affirmed by delay, the question is “whether there was such delay as fairly imports acquiescence”. In this case the total lack of knowledge or capability to discover the truth means no acquiescence. Inevitably there would be a delay between discovery of the truth and the bringing of an action, since a committee had to investigate and then a resolution had to be passed to sue D. This is a reasonable delay. 

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