Guiness plc v Saunders Plc [1989] UKHL 2

House of Lords
Between
Guiness plcAppellantSaunders PlcRespondent
Before
Lord Keith of Kinkel
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal (Civil Division) of the 10th day of May 1988 complained of in the said Appeal be, and the same is hereby, Affirmed and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellant do pay or cause to be paid to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments if not agreed between the parties.Cler: Parliamentor:

Judgment: 8.2.90

HOUSE OF LORDS

GUINNESS PLC (RESPONDENTS)

V.

SAUNDERS AND ANOTHER (APPELLANT)

Lord Keith of Kinkel Lord Brandon of Oakbrook Lord Templeman Lord Griffiths Lord Goff of Chieveley

LORD KEITH OF KINKEL

My Lords,I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Templeman. I agree with it, and for the reasons that he gives I too would dismiss the appeal.

LORD BRANDON OF OAKBROOK

My Lords,For the reasons given in the speech of my noble and learned friend, Lord Templeman, I would dismiss the appeal.

LORD TEMPLEMAN

My Lords,The appellant, Mr. Ward, admits receiving £5.2m., the money of the respondent company, Guinness, at a time when Mr. Ward was a director of Guinness. Payment of this sum to Mr. Ward was, he says, remuneration authorised by Mr. Saunders, Mr. Roux and Mr. Ward, who formed a committee of the board of directors of Guinness. It is admitted by Mr. Ward that payment was not authorised by the board of directors. In these proceedings Guinness claim £5.2m. from Mr. Ward and in this application, Guinness seek an order for immediate payment on the grounds that the Articles of Association of Guinness and the facts admitted by Mr. Ward show that the payment to Mr. Ward was unauthorised

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and must be repaid. The Vice-Chancellor, Sir Nicolas Browne- Wilkinson, made the order sought by Guinness and his decision was affirmed by the Court of Appeal (Fox and Glidewell L.JJ. and Sir Frederick Lawton) [1988] 1 W.L.R. 863. Mr. Ward now appeals.On 19 January 1986 a meeting of the board of directors of Guinness attended by a quorum passed several resolutions. There were 10 directors present; they included the chief executive, Mr. Saunders, and two non-executive directors, Mr. Roux and Mr. Ward. Legal and investment advisers of Guinness were in attendance. The minutes of the meeting record that Mr. Saunders and Mr. Roux explained the background to a proposed recommended offer by Guinness for the issued share capital of The Distillers Company Plc. The board considered drafts of an underwriting agreement, a letter of authority to be signed by each of the directors of Guinness, two commitment letters by banks, and a merger agreement between Guinness and Distillers. Mr. Roux reported on the fees and commissions payable by Guinness pursuant to the underwriting agreement. There is no record of the possibility of any fees, commission or remuneration being payable to a director. The draft merger agreement contained an agreement by Distillers to pay the costs incurred by Guinness if the offer should not prove successful and an agreement by Guinness to indemnify the directors of Distillers should the court determine that it had not been appropriate for the directors of Distillers to enter into the merger agreement and to pay the expenses of Guinness. The board of Guinness resolved that an offer be made and approved the draft documents which had been considered. The board also resolved that "any three directors of the company be and they are hereby appointed a committee of the board with full power and authority" to settle the terms of the offer, to approve any revisions of the offer which the committee might consider it desirable to make and:
"(vi) to authorise and approve, execute and do, or procure to be executed and done, all such documents, deeds, acts and things as they may consider necessary or desirable in connection with the making or implementation of the offer and/or the proposals referred to above and any revision thereof. ..."
It is common ground that Mr. Saunders, Mr. Roux and Mr. Ward established and constituted themselves a committee of the board for the purposes of the resolutions passed on 19 January 1986, that the committee carried the resolutions into effect and that a revised offer resulted in Guinness acquiring all the share capital of Distillers.In these present proceedings, Mr. Ward pleads that in consideration of Mr. Ward "providing advice and services" to Guinness during the currency of the offer (which he refers to as "the bid") Guinness agreed, in the event of the success of the bid, to pay to Mr. Ward a sum equivalent to 0.2 per cent. of the ultimate value of the bid. The agreement is said to have been entered into by Mr. Saunders, Mr. Ward and Mr. Roux on behalf of Guinness and Mr. Ward on his own behalf. It is said that Mr. Saunders orally agreed about 19 February 1986, and that Mr. Roux orally agreed about the beginning of May 1986, and that the agreement was made or evidenced by an invoice delivered to

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Guinness by a company now admitted to be controlled by Mr. Ward. The invoice claimed £5.2m. for advice in respect of the successful acquisition of Distillers. The invoice was approved by Mr. Roux and the sum of £5.2m. was paid. Mr. Ward pleads in the alternative that an agreement by Guinness to pay Mr. Ward for his advice and services was made by Mr. Saunders who had implied actual authority, or ostensible authority, to do so. Mr. Ward pleads that he performed valuable services for the benefit of Guinness in connection with the bid. These services were rendered between 8 January 1986 (a day prior to the board meeting on 19 January) and 20 April 1986. These services as set out in particulars furnished by Mr. Ward were, in summary:(1) negotiations on behalf of Guinness at meetings and in the course of telephone conversations with directors and representatives of Distillers;(2) negotiations on behalf of Guinness at meetings and in the course of telephone conversations with officials of the Monopolies and Mergers Commission; and(3) discussions from time to time of the bid, the revised bid and the desirability of and implementation of the bid at meetings (including the board meeting held on 19 January 1986) and in the course of telephone conversations with members of the board of Guinness and professional advisers of Guinness.Mr. Ward claims particular credit for persuading the Monopolies and Mergers Commission to allow Guinness to bid for Distillers, for persuading some reluctant directors of Guinness to persevere with the bid and for persuading Distillers to pay the costs of Guinness in connection with the bid should it prove unsuccessful.Thus Mr. Ward admits receipt of £5.2m. from Guinness and pleads an agreement by Guinness that he should be paid this sum for his advice and services in connection with the bid. Mr. Ward admits that payment was not authorised by the board of directors of Guinness.The articles of association of guinness provide:
"REMUNERATION OF DIRECTORS. 90. The board shall fix the annual remuneration of the directors provided that without the consent of the company in general meeting such remuneration (excluding any special remuneration payable under article 91 and article 92) shall not exceed the sum of £100,000 per annum. . . . 91. The board may, in addition to the remuneration authorised in article 90, grant special remuneration to any director who serves on any committee or who devotes special attention to the business of the company or who otherwise performs services which in the opinion of the board are outside the scope of the ordinary duties of a director. Such special remuneration may be made payable to such director in addition to or in substitution for his ordinary remuneration as a director, and may be made payable by a lump sum or by way of salary, or commission or participation in profits, or by any or all of those modes or otherwise as the board may determine."
Articles 90 and 91 of the articles of association of Guinness depart from the Table A articles recommended by statute, which reserve to a company in general meeting the right to determine

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the remuneration of the directors of the company. But by article 90 the annual remuneration which the directors may award themselves is limited and by article 91 special remuneration for an individual director can only be authorised by the board. A committee, which may consist of only two or, as in the present case, three members, however honest and conscientious, cannot assess impartially the value of its work or the value of the contribution of its individual members. A director may, as a condition of accepting appointment to a committee, or after he has accepted appointment, seek the agreement of the board to authorise payment for special work envisaged or carried out. The shareholders of Guinness run the risk that the board may be too generous to an individual director at the expense of the shareholders but the shareholders have, by article 91, chosen to run this risk and can protect themselves by the number, quality and impartiality of the members of the board who will consider whether an individual director deserves special reward. Under article 91 the shareholders of Guinness do not run the risk that a committee may value its own work and the contribution of its own members. Article 91 authorises the board, and only the board, to grant special remuneration to a director who serves on a committee.It was submitted that article 2 alters the plain meaning of article 91. In article 2 there are a number of definitions each of which is expressed to apply "if not inconsistent with the subject or context." The expression "the board" is defined as
"the directors of the company for the time being (or a quorum of such directors assembled at a meeting of directors duly convened) or any committee authorised by the Board to act on its behalf."
The result of applying the article 2 definition to article 91, it is said, is that a committee may grant special remuneration to any director who serves on a committee or devotes special attention to the business of the company or who otherwise performs services which in the opinion of the committee are outside the scope of the ordinary duties of a director. In my opinion the subject and context of article 91 are inconsistent with the expression "the board" in article 91, meaning anything except the board. Article 91 draws a contrast between the board and a committee of the board. The board is expressly authorised to grant special remuneration to any director who serves on any committee. It cannot have been intended that any committee should be able to grant special remuneration to any director, whether a member of the committee or not. The board must compare the work of an individual director with the ordinary duties of a director. The board must decide whether special remuneration shall be paid in addition to or in substitution for the annual remuneration determined by the board under article 90. These decisions could only be made by the board surveying the work and remuneration of each and every director. Article 91 also provides for the board to decide whether special remuneration should take the form of participation in profits; the article could not intend that a committee should be able to determine whether profits should accrue to the shareholders' funds or be paid out to an individual director. The remuneration of directors concerns all the members of the board and all the shareholders of Guinness.

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Article 2 does not operate to produce a result which is inconsistent with the language, the subject and the context of article 91. Only the board possessed power to award £5.2m. to Mr. Ward.Reliance was next placed on article 110 which provides:
"The directors may establish any committees, local boards or agencies for managing any of the affairs of the company, either in the United Kingdom, or elsewhere, and may appoint any persons to be members of such local boards, or as managers or agents, and fix their remuneration, and may delegate to any committee, local board, managers or agent any of the powers, authorities and discretions vested in the board, with power to sub-delegate, and may authorise the members of any local board, or any of them to fill any vacancies therein, and to act notwithstanding vacancies, and any such appointment or delegation may be made upon such terms and subject to such conditions as the directors may think fit ... "
Therefore, it is said, the board may delegate to a committee the power conferred on the board by article 91 to grant special remuneration to a director. But article 110 could not have been intended to allow a local board or agency or manager to fix the remuneration of a director and article 110 expressly provides that remuneration shall be fixed by the board. Article 110 does not enable the board to delegate the power of deciding directors' remuneration which by articles 90 and 91 is vested in the board alone.Next, reliance was placed on article 100(D) which is in the following terms:
"Any director may act by himself or his firm in a professional capacity for the company and any company in which the company is interested, and he or his firm shall be entitled to remuneration for professional services as if he were not a director; provided that nothing herein contained shall authorise a director or his firm to act as auditor to the company or any subsidiary."
Article 91 deals with directors' remuneration; article 100(D) deals with directors' charges for professional services. There is a distinction between remuneration and professional charges. Remuneration depends on an assessment of the value of the individual and the perceived quality of his work. Professional charges can be checked by taxation in the case of lawyers and in other instances by professional recommendations and standards of comparison. Mr. Ward nowhere alleges in his pleadings that he provided professional services. Counsel on his behalf stated that Mr. Ward was a member of a New York firm of attorneys. The professional charges of that firm in connection with the bid were paid to the firm pursuant to article 100(D). If Mr. Ward had performed legal professional services separately from the services rendered by his firm, then article 100(D) would apply. The advice and services upon which Mr. Ward relies in these proceedings were not legal professional services. Counsel informed the House that Mr. Ward was one of a number of experts who advise and

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negotiate, implement or frustrate take-over bids. Counsel did not suggest that these experts are all lawyers or that they constitute a profession or that they possessed the indicia of a profession, namely, an organisation which controls entry and membership, provides educational and training qualifications, insists upon a standard of work and behaviour, imposes disciplinary sanctions for misconduct and, above all, acknowledges and enforces a duty to the public over and above the duty common to all of obeying the law. The services pleaded by Mr. Ward were the services he was bound to carry out and which any member of the board is entitled and bound to carry out as a member of a committee established by the board. Guinness admit for the purposes of this application that Mr. Ward performed services which were of value to Guinness, although if it were necessary to do so Guinness would attempt to prove, and Mr. Ward would deny, that Mr. Ward has exaggerated the value of his services and that some of his activities were improper and caused damage to Guinness. For present purposes it suffices that Mr. Ward seeks remuneration for his services as a member of a committee; he is not seeking remuneration for professional services provided in a professional capacity. Failure to comply with article 91 cannot be disguised as an application of article 100(D).Mr. Ward also pleads that Mr. Saunders possessed implied actual authority or ostensible authority to agree on behalf of Guinness that Mr. Ward should be paid for his services. This allegation is inconsistent with the express terms of the resolution dated 19 January 1986 whereby the board conferred power in relation to the bid on the committee and not on Mr. Saunders. The board could not confer on the committee the right to agree or to award special remuneration to a director. The board could not confer such a right on Mr. Saunders. The resolution dated 19 January 1986 does not purport to confer on anybody a power which the board could not confer. The articles of Guinness are binding on the board, on the committee, on Mr. Saunders and on Mr. Ward. Mr. Ward was not entitled to assume that Mr. Saunders possessed an authority inconsistent with the articles of Guinness, inconsistent with the appointment of the committee and inconsistent with the terms of the appointment of the committee. If before or at the board meeting on 19 January 1986 the board had been requested to agree to grant special remuneration to Mr. Ward, such a request might well have met with a favourable response. If the bid for Distillers had not led to allegations of misconduct by Guinness it is possible that the payment of £5.2m. to Mr. Ward's company, apparently for services rendered by his company, would not have been questioned or, at any event, that Mr. Ward would not have been required to repay that sum. But there never was any contract by Guinness to pay special remuneration to Mr. Ward for services rendered in connection with the bid for Distillers.Since, for the purposes of this application, Guinness concede that Mr. Ward performed valuable services for Guinness in connection with the bid, counsel on behalf of Mr. Ward submits that Mr. Ward, if not entitled to remuneration pursuant to the articles, is, nevertheless, entitled to be awarded by the court a sum by way of quantum meruit or equitable allowance for his services. Counsel submits that the sum awarded by the court might amount to £5.2m. or a substantial proportion of that sum;

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therefore Mr. Ward should be allowed to retain the sum of £5.2m. which he has received until, at the trial of the action, the court determines whether he acted with propriety and, if so, how much of the sum of £5.2m. he should be permitted to retain; Mr. Ward is anxious for an opportunity to prove at a trial that he acted with propriety throughout the bid. It is common ground that, for the purposes of this appeal, it must be assumed that Mr. Ward and the other members of the committee acted in good faith and that the sum of £5.2m. was a proper reward for the services rendered by Mr. Ward to Guinness.My Lords,the short answer to a quantum meruit claim based on an implied contract by Guinness to pay reasonable remuneration for services rendered is that there can be no contract by Guinness to pay special remuneration for the services of a director unless that contract is entered into by the board pursuant to article 91. The short answer to the claim for an equitable allowance is the equitable principle which forbids a trustee to make a profit out of his trust unless the trust instrument, in this case the articles of association of Guinness, so provides. The law cannot and equity will not amend the articles of Guinness. The court is not entitled to usurp the functions conferred on the board by the articles.The 28th edition of Snell's Principles of Equity, first published in 1868, contains the distilled wisdom of the author and subsequent editors, including Sir Robert Megarry, on the law applicable to trusts and trustees. It is said, at p. 244, that:
"With certain exceptions, neither directly nor indirectly may a trustee make a profit from his trust. . . . The rule depends not on fraud or mala fides, but on the mere fact of a profit made."
The 24th edition (1987) of Palmer's Company Law, first published in 1898, contains the distilled wisdom of the authors and subsequent editors concerning the law applicable to companies and directors. It is said, in volumn 1, at pp. 943-944, that:
"Like other fiduciaries directors are required not to put themselves in a position where there is a conflict (actual or potential) between their personal interests and their duties to the company. . . . the position of a director, vis-à-vis the company, is that of an agent who may not himself contract with his principal, and ... is similar to that of a trustee who, however fair a proposal may be, is not allowed to let the position arise where his interest and that of the trust may conflict. ... he is, like a trustee, disqualified from contracting with the company and for a good reason: the company is entitled to the collective wisdom of its directors, and if any director is interested in a contract, his interest may conflict with his duty, and the law always strives to prevent such a conflict from arising."
The application of these principles to remuneration in the case of a trustee is described by Snell as follows, at p. 252:
"As the result of the rule that a trustee cannot make a profit from his trust, trustees and executors are generally

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entitled to no allowance for their care and trouble. This rule is so strict that even if a trustee or executor has sacrificed much time to carrying on a business as directed by the trust, he will usually be allowed nothing as compensation for his personal trouble or loss of time."The application of these principles to remuneration in the case of a director is described by Palmer as follows, at p. 902:
"Prima facie, directors of a company cannot claim remuneration, but the articles usually provide expressly for payment of it ... and, where this is the case, the provision operates as an authority to the directors to pay remuneration out of the funds of the company; such remuneration is not restricted to payment out of profits."
The following also appears, at p. 903 :
"The articles will also usually authorise the payment by the directors to one of their number of extra remuneration for special services. Where such provision is made, it is a condition precedent to a director's claim for additional remuneration that the board of directors shall determine the method and amount of the extra payment; it is irrelevant that the director has performed substantial extra services and the payment of additional remuneration would be reasonable."
So far as contract is concerned, Lord Cranworth L.C., in Aberdeen Railway Co. v. Blaikie Bros. (1854) 1 Macq. H.L. 461, considered, at pp. 471-472:
"the general question, whether a director of a railway company is or is not precluded from dealing on behalf of the company with himself, or with a firm in which he is a partner. The directors are a body to whom is delegated the duty of managing the general affairs of the company. A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the cestui que trust which it was possible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee have been as good as could have been obtained from any other person - they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted."

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So far as equity is concerned, Sir John Stuart V.-C. in Barrett v. Hartley (1866) L.R. 2 Eq. 789 said, at p. 796, that there was a:
"very well established principle of this court that a trustee is not to exact anything for his services. For the defendant it was contended, that although the payment was called a bonus, it was for important services rendered. No doubt the importance and benefit of the services can hardly be exaggerated. But a trustee who greatly benefits his cestui que trust by performing his duties is not entitled to say to him that he will not give him his property, or proceed to execute the trust, unless he be paid a bonus."
In Bray v. Ford [1896] AC 44 a solicitor who was a governor of a charitable college charged profit costs for his professional services under the mistaken belief that the memorandum of association allowed him to do so. Lord Watson said, at p. 48, that the respondent was not
"legally justified in charging and accepting payment of full professional remuneration in respect of services rendered by him to the college in his capacity of solicitor .... the respondent was neither entitled to charge profit costs in respect of these services, nor to retain them when received by him. Such a breach of the law may be attended with perfect good faith, and it is, in my opinion, insufficient to justify a charge of moral obliquity, unless it is shown to have been committed knowingly or with an improper motive."
Lord Herschell said, at pp. 51-52:
"It is an inflexible rule of a court of equity that a person in a fiduciary position, such as the respondent's, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary duty being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule. But I am satisfied that it might be departed from in many cases, without any breach of morality, without any wrong being inflicted, and without any consciousness of wrongdoing."
Equity forbids a trustee to make a profit out of his trust. The Articles of Association of Guinness relax the strict rule of equity to the extent of enabling a director to make a profit provided that the board of directors contracts on behalf of Guinness for the payment of special remuneration or decides to award special remuneration. Mr. Ward did not obtain a contract or a grant from the board of directors. Equity has no power to relax its own strict rule further than and inconsistently with the express relaxation contained in the articles of association. A

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shareholder is entitled to compliance with the articles. A director accepts office subject to and with the benefit of the provisions of the articles relating to directors. No one is obliged to accept appointment as a director. No director can be obliged to serve on a committee. A director of Guinness who contemplates or accepts service on a committee or has performed outstanding services for the company as a member of a committee may apply to the board of directors for a contract or an award of special remuneration. A director who does not read the articles or a director who misconstrues the articles is nevertheless bound by the articles. Article 91 provides clearly enough for the authority of the board of directors to be obtained for the payment of special remuneration and the submissions made on behalf of Mr. Ward, based on articles 2, 100(D) and 110, are more ingenious than plausible and more legalistic than convincing. At the board meeting held on 19 January 1986, Mr. Ward was present but did not seek then or thereafter to obtain the necessary authority of the board of directors for payment of special remuneration. In these circumstances there are no grounds for equity to relax its rules further than the articles of association provide. Similarly, the law will not imply a contract between Guinness and Mr. Ward for remuneration on a quantum meruit basis awarded by the court when the articles of association of Guinness stipulate that special remuneration for a director can only be awarded by the board.It was submitted on behalf of Mr. Ward that Guinness, by the committee consisting of Mr. Saunders, Mr. Ward and Mr. Roux, entered into a voidable contract to pay remuneration to Mr. Ward and that since Mr. Ward performed the services he agreed to perform under this voidable contract there could be no restitutio integrum and the contract cannot be avoided. This submission would enable a director to claim and retain remuneration under a contract which a committee purported to conclude with him, notwithstanding that the committee had no power to enter into the contract. The fact is that Guinness never did contract to pay anything to Mr. Ward. The contract on which Mr. Ward relies is not voidable but non-existent. In support of a quantum meruit claim, counsel for Mr. Ward relied on the decision of Buckley J. in In re Duomatic Ltd. [1969] 2 Ch. 365. In that case a company sought and failed to recover remuneration received by a director when the shareholders or a voting majority of the shareholders had sanctioned or ratified the payment. In the present case there has been no such sanction or ratification either by the board of directors or by the shareholders. Mr. Ward also relied on the decision in Craven-Ellis v. Canons Ltd. [1936] 2 K.B. 403. In that case the plaintiff was appointed managing director of a company by an agreement under the company's seal which also provided for his remuneration. By the articles of association each director was required to obtain qualification shares within two months of his appointment. Neither the plaintiff nor the other directors obtained their qualification shares within two months or at all and the agreement with the managing director was entered into after they had ceased to be directors. The plaintiff having done work for the company pursuant to the terms of the agreement was held to be entitled to the remuneration provided for in the agreement on the basis of a quantum meruit. In Craven-Ellis the plaintiff was not a director, there was no conflict between his claim to remuneration and the equitable doctrine which debars a director from profiting from his fiduciary duty, and there was no obstacle

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to the implication of a contract between the company and the plaintiff entitling the plaintiff to claim reasonable remuneration as of right by an action in law. Moreover, as in In re Duomatic Ltd. , the agreement was sanctioned by all the directors, two of whom were beneficially entitled to the share capital of the company. In the present case Mr. Ward was a director, there was a conflict between his interest and his duties, there could be no contract by Guinness for the payment of remuneration pursuant to article 91 unless the board made the contract on behalf of Guinness and there was no question of approval by directors or shareholders.In support of a claim for an equitable allowance, reference was made to the decision of Wilberforce J. in Phipps v. Boardman [1964] 1 W.L.R. 993. His decision was upheld by the Court of Appeal [1965] Ch. 992 and ultimately by this House under the name of Boardman v. Phipps [1967] 2 AC 46 . In that case a trust estate included a minority holding in a private company which fell on lean times. The trustees declined to attempt to acquire a controlling interest in the company in order to improve its performance. The solicitor to the trust and one of the beneficiaries, with the knowledge and approval of the trustees, purchased the controlling interest from outside shareholders for themselves with the help of information about the shareholders acquired by the solicitor in the course of acting for the trust. The company's position was improved and the shares bought by the solicitor and the purchasing beneficiary were ultimately sold at a profit. A complaining beneficiary was held to be entitled to a share of the profits on the resale on the grounds that the solicitor and the purchasing beneficiary were assisted in the original purchase by the information derived from the trust. The purchase of a controlling interest might have turned out badly and in that case the solicitor and the purchasing beneficiary would have made irrecoverable personal losses. In these circumstances it is not surprising that Wilberforce J. decided that in calculating the undeserved profit which accrued to the trust estate there should be deducted a generous allowance for the work and trouble of the solicitor and purchasing beneficiary in acquiring the controlling shares and restoring the company to prosperity. Phipps v. Boardman decides that in exceptional circumstances a court of equity may award remuneration to the trustee. Therefore, it is argued, a court of equity may award remuneration to a director. As at present advised, I am unable to envisage circumstances in which a court of equity would exercise a power to award remuneration to a director when the relevant articles of association confided that power to the board of directors. Certainly, the circumstances do not exist in the present case. It is in this respect that section 317 of the Companies Act 1985 is relevant. By that section:
"(1) It is the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company .... (7) A director who fails to comply with this section is liable to a fine. . . ."
In Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549, the Court of Appeal held that section 317 renders a contract voidable

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by a company if the director does not declare his interest. Section 317 does not apply directly to the present case because there was no contract between Guinness and Mr. Ward. But section 317 shows the importance which the legislature attaches to the principle that a company should be protected against a director who has a conflict of interest and duty. There is a fundamental objection to the admission of any claim by Mr. Ward whether that claim be based on article 100(D), a quantum meruit, section 727 of the Act of 1985 or the powers of a court of equity. The objection is that by the agreement with the committee, which is the foundation of Mr. Ward's claim to any relief, he voluntarily involved himself in an irreconcilable conflict between his duty as a director and his personal interests. Both before and after 19 January 1986, Mr. Ward owed a duty to tender to Guinness impartial and independent advice untainted by any possibility of personal gain. Yet by the agreement, which Mr. Ward claims to have concluded with the committee and which may have been in contemplation by Mr. Ward even before 19 January 1986, Mr. Ward became entitled to a negotiating fee payable by Guinness if, and only if, Guinness acquired Distillers and, by the agreement, the amount of the negotiating fee depended on the price which Guinness ultimately offered to the shareholders of Distillers. If such an agreement had been concluded by the board of directors, it would have been binding on Guinness under article 91 but foolish in that the agreement perforce made Mr. Ward's advice to Guinness suspect and biased. But at least the conflict would have been revealed to the board. As it was, the agreement was not made by the board and was not binding on Guinness. The agreement was made by the committee and ought not to have been made at all. By the agreement Mr. Ward debarred himself from giving impartial and independent advice to Guinness. Mr. Ward was a director of Guinness and in that capacity was able to negotiate his own agreement with the committee of which he was a member, and was able to discuss the bid by Guinness for Distillers with the other directors, to advise and participate in decisions on behalf of Guinness relevant to the bid (including a decision to increase the amount of the offer) and to procure the acquisition by Guinness of Distillers and thus to claim £5.2m. from Guinness. I agree with my noble and learned friend Lord Goff of Chieveley that for the purposes of this appeal it must be assumed that Mr. Ward acted in good faith, believing that his services were rendered under contract binding on the company, and that in that mistaken belief Mr. Ward may have rendered services to Guinness of great value and contributed substantially to the enrichment of the shareholders of Guinness. Nevertheless, the failure of Mr. Ward to realise that he could not properly use his position as director of Guinness to obtain a contingent negotiating fee of £5.2m. from Guinness does not excuse him or enable him to defeat the rules of equity which prohibit a trustee from putting himself in a position in which his interests and duty conflict and which insist that a trustee or any other fiduciary shall not make a profit out of his trust.Finally, judgment against Mr. Ward on this application was resisted in reliance on section 727 of the Act of 1985. That section provides:
"(1) If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or

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a person employed by a company as auditor ... it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit. . . ."Mr. Ward requested the committee to pay him and received from the committee out of moneys belonging to Guinness the sum of £5.2m. as a reward for his advice and services as a director. Mr. Ward had no right to remuneration without the authority of the board. Thus the claim by Guinness for repayment is unanswerable. If Mr. Ward acted honestly and reasonably and ought fairly to be excused for receiving £5.2m. without the authority of the board, he cannot be excused from paying it back. By invoking section 727 as a defence to the claim by Guinness for repayment, Mr. Ward seeks an order of the court which would entitle him to remuneration without the authority of the board. The order would be a breach of the articles which protect shareholders and govern directors and would be a breach of the principles of equity to which I have already referred.I would dismiss this appeal.

LORD GRIFFITHS

My Lords,I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Templeman and Lord Goff of Chieveley. I agree with them, and for the reasons that they give I too would dismiss the appeal.

LORD GOFF OF CHIEVELEY

My Lords,In this case, Guinness seeks judgment for the recovery of a sum of £5.2m. paid to the appellant, Mr. Ward, without a trial. Before the Vice-Chancellor it obtained a judgment on admissions; the Vice-Chancellor's decision was affirmed by the Court of Appeal, from whose decision Mr. Ward now appeals to your Lordships' House.I believe that I am not the only person concerned with these proceedings who has been startled by the size of that sum, which Mr. Ward has claimed to have been paid to him under a contract binding on Guinness. But, for present purposes, the

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amount is irrelevant. For since Guinness is seeking a judgment without a trial in proceedings in which Mr. Ward is protesting his good faith, he must be treated as, ex hypothesi, an innocent man, who has acted throughout in complete good faith, under what he believed to be a contract binding on Guinness, and indeed as one who claims to have rendered valuable services to Guinness, performed with great skill, which have contributed significantly, perhaps crucially, to the success of Guinness's bid for the shares in Distillers, thereby very substantially enriching the shareholders of Guinness. It is on this basis that Guinness's claim to be entitled to judgment against Mr. Ward has to be considered. It has also to be borne in mind that Mr. Ward claims that, if by any chance he is not entitled to the sum of £5.2m. under a contract binding on Guinness, then he is entitled to some recompense for the services which ex hypothesi he has rendered to Guinness, either by way of an equitable allowance, or on a quantum meruit, or under section 727 of the Act of 1985.What course has the action taken? Before the Vice- Chancellor, judgment was given against Mr. Ward on admissions, on the basis that he had received the money in breach of his fiduciary duty as a director of Guinness, by reason of his failure to disclose his interest in the agreement under which he performed the services, as required by section 317(1) of the Act of 1985. In the Court of Appeal, Mr. Ward's appeal against that decision was dismissed. It was said of him [1988] 1 W.L.R. 863, 870-871 that he had "succeeded in getting his hands on the company's money," and that the company had never ceased to own the money which he had been paid. Accordingly Mr. Ward was constructive trustee of the money which he had received, and must pay it back. If he wished to make a claim for remuneration in respect of the services which he claimed to have rendered to Guinness, he must bring a separate action.The matter then came before your Lordships' House, by leave of the House. Mr. Ward's submissions were presented to the Appellate Committee, in an argument conspicuous for its moderation as well as for its skill, by junior counsel, Mr. Crow. It gradually became clear that Mr. Crow's criticisms of the decisions of the courts below were well founded, and that (quite apart from very serious difficulties arising upon the construction of section 317) they were inconsistent with Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549, a decision of an exceptional Court of Appeal consisting of Lord Denning M.R., Lord Wilberforce and Lord Pearson. The decision in that case proceeded on the basis that the statutory duty of disclosure (then embodied in section 199 of the Companies Act 1948) did not of itself affect the validity of a contract. The section had however to be read with provisions in the articles, imposing a duty of disclosure upon directors of the company. If a director enters into, or is interested in, a contract with the company, but fails to declare his interest, the effect is that, under the ordinary principles of law and equity, the contract may be voidable at the instance of the company, and in certain cases a director may be called upon to account for profits made from the transaction: see per Lord Wilberforce, at p. 589, and Lord Pearson, at p. 594. Perhaps the matter is put most clearly by Lord Pearson, who said:

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"It is not contended that section 199 in itself affects the contract. The section merely creates a statutory duty of disclosure and imposes a fine for non-compliance. But it has to be read in conjunction with article 99. The first sentence of that article is obscure. If a director makes or is interested in a contract with the company, but fails duly to declare his interest, what happens to the contract? Is it void, or is it voidable at the option of the company, or is it still binding on both parties, or what? The article supplies no answer to these questions. I think the answer must be supplied by the general law, and the answer is that the contract is voidable at the option of the company, so that the company has a choice whether to affirm or avoid the contract, but the contract must be either totally affirmed or totally avoided and the right of avoidance will be lost if such time elapses or such events occur as to prevent rescission of the contract. . . ."
On this basis I cannot see that a breach of section 317, which is not for present purposes significantly different from section 199 of the Act of 1948, had itself any effect upon the contract between Mr. Ward and Guinness. As a matter of general law, to the extent that there was failure by Mr. Ward to comply with his duty of disclosure under the relevant article of Guinness (article 100(A)), the contract (if any) between him and Guinness was no doubt voidable under the ordinary principles of the general law to which Lord Pearson refers. But it has long been the law that, as a condition of rescission of a voidable contract, the parties must be put in statu quo; for this purpose a court of equity can do what is practically just, even though it cannot restore the parties precisely to the state they were in before the contract. The most familiar statement of the law is perhaps that of Lord Blackburn in Erlanger v. New Sombrero Phosphate Co. (1878) 3 App.Cas. 1218, when he said, at p. 1278:
"It is, I think, clear on principles of general justice, that as a condition to a rescission there must be a restitutio in integrum. The parties must be put in statu quo. ... It is a doctrine which has often been acted upon both at law and in equity."
However on that basis Guinness could not simply claim to be entitled to the £5.2m. received by Mr. Ward. The contract had to be rescinded, and as a condition of the rescission Mr. Ward had to be placed in statu quo. No doubt this could be done by a court of equity making a just allowance for the services he had rendered; but no such allowance has been considered, let alone made, in the present case.Faced with these problems, Mr. Oliver Q.C. was driven, in the last resort, to submit that Hely-Hutchinson v. Brayhead Ltd. was wrongly decided. I have to confess that I would hesitate long before holding that a decision of such a court was erroneous. Careful study of the decision, with the assistance of counsel, merely served to reinforce my natural expectation that the case was rightly decided.This being so, it followed that the decisions of the courts below in the present case, founded as they were upon a breach of

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section 317 by Mr. Ward, were erroneous. In ordinary circumstances, this conclusion would have led to the appeal being allowed. But Mr. Oliver then sought to justify the judgment on other grounds. It was first suggested by him quite simply that Mr. Ward, having received the money as constructive trustee, must pay it back. This appears to have formed, in part at least, the basis of the decision of the Court of Appeal. But the insuperable difficulty in the way of this proposition is again that the money was on this approach paid not under a void, but under a voidable, contract. Under such a contract, the property in the money would have vested in Mr. Ward (who, I repeat, was ex hypothesi acting in good faith); and Guinness cannot short circuit an unrescinded contract simply by alleging a constructive trust.The next suggestion was that it was unnecessary to have regard to section 317 at all. There was a simpler solution to the problem. The committee which Mr. Ward claimed to have agreed to his remuneration, thereby binding the company, had no power to do so, either under article 91 or under article 100(D) of the articles of association. It followed that the contract upon which Mr. Ward relied was void for want of authority, and that Guinness was therefore entitled to recover from Mr. Ward the money paid under it on the ground of total failure of consideration, or alternatively on the basis that he had received the money as constructive trustee. On this basis, it was suggested, summary judgment should be entered against Mr. Ward for the full sum.Having had the benefit of the assistance of counsel, I have reached the conclusion that article 91 does not empower a committee of the board of Guinness to authorise special remuneration for services rendered by directors of the company. It is true that the articles of Guinness are conspicuous neither for their clarity nor for their consistency. In particular there is no sensible basis upon which it is possible to reconcile article 91 with article 110 without doing violence to the language of one or other article. But I am satisfied that I should accept Guinness's argument on this point.But what about article 100(D)? Plainly, on its express words, it is outside the ambit of article 91. For under it a director who acts for the company in a professional capacity is to be remunerated as if he were not a director.Mr. Crow told your Lordships that Mr. Ward claims that he was acting in a professional capacity, in that he was acting as a business consultant. Your Lordships' House has to consider whether that submission should be rejected without hearing any evidence upon it. I have been troubled whether it would be proper to do so. There is a tendency among elderly professional men to restrict the meaning of the word "profession" to the older professions, such as the church, medicine and the law. But, in the course of this century, the meaning of the word has expanded, and I suspect that it is still expanding at an accelerating rate. For my part, I would be unwilling to hold, without evidence, what are the modern professions today. Even so, as is demonstrated in the speech of my noble and learned friend, Lord Templeman, there are the most formidable difficulties which would in any event have to be surmounted if business consultancy as such were to be recognised as a profession; and, especially as the expression

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"business consultant" is capable of more than one meaning, I am satisfied that a bare assertion of the proposition cannot of itself be enough to justify a trial on this point in the present case.The matter may be more appropriately approached in another way. Mr. Ward's profession was undoubtedly that of an American attorney, he being the senior partner in a law firm in Washington D.C.; and I can find no allegation in the pleadings that he was acting as a professional business consultant. Let it be supposed that he was not an American attorney but an English solicitor. It is well known that English solicitors may develop the most formidable negotiating skills, which they may deploy in the course of their profession as solicitors. No doubt the same is true of many experienced American attorneys. Had an English solicitor, who was also a non-executive director of Guinness, acted as Mr. Ward claims to have done, there might be circumstances in which he could claim to have acted in his professional capacity as a solicitor in this country. But it appears that Mr. Ward was not acting, in the context of a purely English take-over bid, in the course of his profession as an American attorney. He appears to have been simply deploying, as a non-executive director of Guinness, an incidental (though no doubt important) skill which he had acquired in the exercise of his profession. On this basis, on his pleaded case, Mr. Ward could not have been acting in the course of his profession and article 100(D) has no application in the present case.But the matter does not stop there. Let it be accepted that the contract under which Mr. Ward claims to have rendered valuable services to Guinness was for the above reasons void for want of authority. I understand it to be suggested that articles 90 and 91 provide (article 100 apart) not only a code of the circumstances in which a director of Guinness may receive recompense for services to the company, but an exclusive code. This is said to derive from the equitable doctrine whereby directors, though not trustees, are held to act in a fiduciary capacity, and as such are not entitled to receive remuneration for services rendered to the company except as provided under the articles of association, which are treated as equivalent to a trust deed constituting a trust. It was suggested that, if Mr. Ward wishes to receive remuneration for the services he has rendered, his proper course is now to approach the board of directors and invite them to award him remuneration by the exercise of the power vested in them by article 91.The leading authorities on the doctrine have been rehearsed in the opinion of my noble and learned friend, Lord Templeman. These indeed demonstrate that the directors of a company, like other fiduciaries, must not put themselves in a position where there is a conflict between their personal interests and their duties as fiduciaries, and are for that reason precluded from contracting with the company for their services except in circumstances authorised by the articles of association. Similarly, just as trustees are not entitled, in the absence of an appropriate provision in the trust deed, to remuneration for their services as trustees, so directors are not entitled to remuneration for their services as directors except as provided by the articles of association.

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Plainly, it would be inconsistent with this long-established principle to award remuneration in such circumstances as of right on the basis of a quantum meruit claim. But the principle does not altogether exclude the possibility that an equitable allowance might be made in respect of services rendered. That such an allowance may be made to a trustee for work performed by him for the benefit of the trust, even though he was not in the circumstances entitled to remuneration under the terms of the trust deed, is now well established. In Phipps v. Boardman [1964] 1 W.L.R. 993, the solicitor to a trust and one of the beneficiaries were held accountable to another beneficiary for a proportion of the profits made by them from the sale of shares bought by them with the aid of information gained by the solicitor when acting for the trust. Wilberforce J. directed that, when accounting for such profits, not merely should a deduction be made for expenditure which was necessary to enable the profit to be realised, but also a liberal allowance or credit should be made for their work and skill. His reasoning was, at p. 1018:
"Moreover, account must naturally be taken of the expenditure which was necessary to enable the profit to be realised. But, in addition to expenditure, should not the defendants be given an allowance or credit for their work and skill? This is a subject on which authority is scanty; but Cohen J., in In re Macadam [1946] Ch. 73, 82, gave his support to an allowance of this kind to trustees for their services in acting as directors of a company. It seems to me that this transaction, i.e., the acquisition of a controlling interest in the company, was one of a special character calling for the exercise of a particular kind of professional skill. If Boardman had not assumed the role of seeing it through, the beneficiaries would have had to employ (and would, has they been well advised, have employed) an expert to do it for them. If the trustees had come to the court asking for liberty to employ such a person, they would in all probability have been authorised to do so, and to remunerate the person in question. It seems to me that it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it."
Wilberforce J.'s decision, including his decision to make such an allowance, was later to be affirmed by the House of Lords (sub tit. Boardman v. Phipps [1967] 2 AC 46 ).It will be observed that the decision to make the allowance was founded upon the simple proposition that "it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it." Ex hypothesi, such an allowance was not in the circumstances authorised by the terms of the trust deed; furthermore it was held that there had not been full and proper disclosure by the two defendants to the successful plaintiff beneficiary. The inequity was found in the simple proposition that the beneficiaries were taking the profit although, if Mr. Boardman (the solicitor) had not done the work, they would have had to employ an expert to do the work for them in order to earn that profit.

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The decision has to be reconciled with the fundamental principle that a trustee is not entitled to remuneration for services rendered by him to the trust except as expressly provided in the trust deed. Strictly speaking, it is irreconcilable with the rule as so stated. It seems to me therefore that it can only be reconciled with it to the extent that the exercise of the equitable jurisdiction does not conflict with the policy underlying the rule. And, as I see it, such a conflict will only be avoided if the exercise of the jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees in any way to put themselves in a position where their interests conflict with their duties as trustees.Not only was the equity underlying Mr. Boardman's claim in Phipps v. Boardman clear and, indeed, overwhelming; but the exercise of the jurisdiction to award an allowance in the unusual circumstances of that case could not provide any encouragement to trustees to put themselves in a position where their duties as trustees conflicted with their interests. The present case is, however, very different. Whether any such an allowance might ever be granted by a court of equity in the case of a director of a company, as opposed to a trustee, is a point which has yet to be decided; and I must reserve the question whether the jurisdiction could be exercised in such a case, which may be said to involve interference by the court in the administration of a company's affairs when the company is not being wound-up. In any event, however, like my noble and learned friend, Lord Templeman, I cannot see any possibility of such jurisdiction being exercised in the present case. I proceed, of course, on the basis that Mr. Ward acted throughout in complete good faith. But the simple fact remains that, by agreeing to provide his services in return for a substantial fee the size of which was dependent upon the amount of a successful bid by Guinness, Mr. Ward was most plainly putting himself in a position in which his interests were in stark conflict with his duty as a director. Furthermore, for such services as he rendered, it is still open to the board of Guinness (if it thinks fit, having had a full opportunity to investigate the circumstances of the case) to award Mr. Ward appropriate remuneration. In all the circumstances of the case, I cannot think that this is a case in which a court of equity (assuming that it has jurisdiction to do so in the case of the director of a company) would order the repayment of the £5.2m. by Mr. Ward to Guinness subject to a condition that an equitable allowance be made to Mr. Ward for his services.Finally, I cannot see any prospect of success in a claim by Mr. Ward to relief under section 727 of the Act of 1985. Given that Guinness's claim must be one for the recovery of money paid to Mr. Ward under a void contract and received by him as a constructive trustee, there is no question of his being able to claim relief from liability for breach of duty, as might have been the case if Guinness's claim has been founded upon breach by Mr. Ward of his duty of disclosure.I have been very conscious, throughout this case, that Guinness is seeking summary judgment for the sum claimed by it, without any trial on the merits. Even so, I have come to the conclusion that Mr. Ward has no arguable defence to Guinness's claim. The simple fact emerges, at the end of the day, that

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there was, in law, no binding contract under which Mr. Ward was entitled to receive the money and that, as a fiduciary, he must now restore that money to Guinness. For these reasons, I would dismiss the appeal.

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