Legal Case Summary
Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206
Whether implied term of contract that director not be removed during fixed term
Facts
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.
Issues
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.
Decision / Outcome
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.
Updated 20 March 2026
This case summary remains legally accurate. Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 is a well-established authority and the legal principles it established continue to be good law. The relevant statutory provision discussed in the case (s10 Companies Act 1929) has long since been superseded, but the underlying principle — that a company retains the power to alter its articles of association, yet may face liability in damages if it does so in a way that breaches a pre-existing contractual obligation — remains valid under current company law. This principle is consistent with the Companies Act 2006, which governs the amendment of articles of association (see in particular s21 CA 2006), and with subsequent case law. The case is also notable as the source of the famous ‘officious bystander’ test for implying terms into contracts, articulated by MacKinnon LJ, which remains a recognised (if now supplemented) test for implied terms following the Supreme Court’s analysis in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72. Readers should be aware that the modern law on implied terms is more fully set out in that Supreme Court decision.
