Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex D 20
Company law; internal management of a company; nature of rights arising under internal management rules.
Facts: Baylis wished to form a company but needed to borrow £200 to pay the initial costs. He borrowed this amount from Eley, a solicitor, on the understanding that in consideration of the loan, Eley would be appointed as the permanent solicitor of the new company. The company was formed and its articles of association contained a provision that "Mr William Eley…shall be the solicitor of the company, and shall transact all the legal business of the company…and shall not be removed from his office except for misconduct". However, after some time, the company ceased to employ Eley as its solicitor. Eley, relying on the provisions in the company's articles of association, sued the company for breach of contract.
Issue: Did the provisions in the company's articles of association create an enforceable contract between Eley and the company?
Decision: Although his employment as a solicitor was provided for in the articles, Eley, was not a party to the articles The provisions of the articles of association were not enforceable as a contract between Eley and the company.
Reason: Amphlett B said (at 26):
"Under these circumstances it could not, in my opinion, be successfully contended that the 118th clause of the articles of association created any contract between the plaintiff and the company. The articles, taken by themselves, are simply a contract between the shareholders inter se [between themselves] and cannot, in my opinion, give a right of action to a person like the plaintiff, not a party to the articles, although named therein."