PAYMENT OF DAIRY BONUS

Taranaki Daily News, 18 July 1929, Page 14

PAYMENT OF DAIRY BONUS

JUDGMENT FOR A SUPPLIER SSL VALIDITY OF COMPANY ARTICLE.' IMPORTANT ELTHAM LAW ACTION “The case raises difficult and important questions as to the validity of certain of the company’s articles of association,” said Mr. Justice Ostler when referring to the Eltham Co-operative Dairy Company, Ltd., in a reserved judgment delivered in New Plymouth yesterday. His Honour found in favour of William Johnson, who sought the recovery of £lOl 16s 7d, the balance due for milk supplied to. the company from July, 1924, to February, 1925. He was allowed costs according to scale, witnesses’ expenses and disbursements. The case was held at the recent sitting of the Supremo Court. The company was incorporated in 1892, said the judge, and clause 8. of its articles was as follows: “Subject to such dividends as may be from time to time declared (as remuneration to the shareholders for the capital paid by them to the company, the whole of the net profits shall be paid to suppliers, provided each supplier holds one share for every 300 gallons of milk or 1081 b. of butterfat supplied by him during the year; otherwise any milk or butter-fat supplied and not supported by one share shall not be counted or taken into account in calculating the proportion of profits to which each shareholder shall ho entitled.”

Johnson became a shareholder in 1911 when he acquired 76 shares under the original articles. In May, 1912, the company altered its articles by providing that suppliers should take up one share lor every 150 gallons of milk, or 561 b of fat supplied. On September 7, 1912, Johnson acquired a further 107 shares In compliance with the requirements of the amended articles and these were not fully paid up till June, 1920. In 1917 the articles were again altered by describing a bona fide member as one who “holds the number of shares required by article 8 within the time required, and who supplies the company with all the milk he receives from the particular herd of cows he has for the purpose of supplying milk, save such a reasonable quantity as he may require for his own use during the milking season, that it, all times during the financial year of the company when the particular factory or creamery is open to receive milk from members.” Article 8 required each supplier to hold one share at least tor every 150 gallons of milk, or 561 b. of fat supplied during the year.

DID NOT KNOW ARTICLES ALTERED

Article 55 wag to the effect that all milk, fat or produce supplied by a person not a bona fide member, who did not hold shares, should, in the absence of any agreement regarding price, be deemed to be purchased by the company at the price paid to members at the end of the monthly period. Such a supplier would, however, not bo entitled to any further payments the company might make in any subsequent month for the same milk or fat, and all moneys received by the company for this milk or fat above the amount paid to the supplier in question should be deemed to be profits of the company. Johnson could not remember whether he received notice of the meetings in 1917 to consider these amendments to the articles, said the judge. He swore that he did not attend the meeting and did not know the articles had been altered, and there was no evidence from a minute book or otherwise to show he ■was present at either of the meetings. He admitted that he subsequently attended at least one annual meeting and voted, but His Honour had no reason to disbelieve his evidence that he was unaware of the new provision that if a member did not supply milk for the whole season he would get no payment beyond the ordinary monthly payment. He continued to supply the whole of his milk to the company down to the end of the 1923-24 season. In the following season he supplied the whole of his milk to the company till November 4, 1924, and from then till February 28, 1925, he supplied only half of his milk to the company. During this period he was informed by the company that unless he supplied the whole of his milk he would not be entitled to share in the bonuses. He replied that he knew all about the articles. Till then, he explained, he had not known that the articles provided in this direction. From February 28, 1925, Johnson ceased to supply milk to tho company. The practice of the company was to pay out to members on the twentieth of each month a sum in accordance with the supply for the previous month. The amount of that sura was based, according to Knuckey, one of the directors, upon tho then ruling price on the London market and upon the state of the company’s finances. The following figures showed the payments per lb. of fat to Johnson as a non bona fide member and to bona fide members: July, 1924, Johnson received Is fid, bona fide members received Is fid; August, 1924, Is 8d and Is 8d; September, 1924, Is 3d and Is 8 1-Sd: October, 1924, Is 3d and Is 8 l-8d; November, 1924, Is 3d and Is 8 l-8d; December, 1924, Is 3d and Is 8 l-8d; January, 1925, Is 4d and Is 8 1-Sd; February, 1925, Is 4d and Is 8 l-Bd. PRINCIPLE OF COMPANY LAW. During the whole of the season 1924B 5 Johnson was the holder of the requisite number of shares. He claimed £lOl 16s 7d, the amount of subsequent payments, or bonuses, he would have received had he continued to supply all his milk to the end of the season. The reply of the company was that as he ■was not a bona fide member, by virtue of article 55 he was not entitled to more than the monthly payments he had received. Johnson rejoined that article 55 was ultra vires and therefore void as a legislative act of the oempany, that if considered as evidence of a contract Johnson never agreed to that contract, and that, even if he did, the contract was void because it was unreasonable restraint of trade.

“In my opinion,” continued His Hon©ui, “no principle of company law is more clearly settled than the principle that a company cannot by its articles impose upon its members any pecuniary obligation over and above the obligation to pay up to the full the amount due on the shares they have agreed to take. That is a fundamental principle lying at the root of company law.” Mr. Justice Ostler proceeded to show that the principle was recognised by the Full Court in 1923 in the case of McDonald aganist the Normanby Dairy

Company and had. been restated in a masterly manner by Mr. Justice Salmond in 1924, when the Court of Appeal heard the case of Shalfoon against the Cheddar Valley Dairy Company. It had been suggested for the defence that Mr. Justice Salmond’s, judgment had been weakened because it was partly based on a case since over-ruled by the House of Lords, but His Honouor held that this was not so, as in the case referred to was decided on the ground that there was a contract by the objecting member to take up additional shares in his society. After further discussing the position so far as the law was concerned, His Honour said: “A company, of course, has power to make contracts with its members in the same manner and to the same extent as it has power to make contracts with strangers. There seems no reason in law why the terms of such contracts should not be embodied in its articles. Biddulph’s case is an authority to show that they can, and it has become a common practice to so insert the terms of contracts between a company and its members.”

Ho said that although such articles would be ultra vires of the company if relied on as regulations made by the company’s own legislative authority they might well be quite valid contracts between the company and its members. For, instance, in the case of McDonald against the Normanby Dairy Company an article purporting to bind shareholders to take up additional shares in a certain proportion to the milk they supplied was held to be ultra vires as a regulation. But there was no reason why that article should not be binding as a contract upon every shareholder who could be proved to have agreed to it. The question of a contract did not arise in McDonald’s case because he had been a dissenting party to the alteration of the articles and had refused to take up the additional shares required by it. HOW ARTICLE IS ULTRA VIRES. “In this case, in my opinion article 55 regarded as an act of legislative authority by the company over its shareholders is ultra vires of the company,” said His Honour. “In effect, it provides that unless a member supplied all his milk for the whole season, the company shall have the right to forfeit and retain part of its value. In other words, it imposes a penalty upon shareholders who do not supply all • their milk for the season. That penalty may be a very small one if the supplici ceases to supply early in the season, or it may be a very substantial one if the supply is kept up for the greater part of the season. I agree with Mr. Justice Salmond that there is no distinction in principle between an obligation to find money and one to find money’s worth. “In my opinion a company, whether a co-operative dairy company or not, has no power, apart from a contract with its members, to provide by its articles that its members shall supply all their milk for the season on pain of the company forfeiting a part of its value. Although this is not done in form, it is done in substance. But, in my opinion, there is no reason in law why a cooperative dairy company should not make such an agreement with its members. It is essential to the success of such a company that a continuity of its supply should be assured. It seems to me, in view of the circumstances of the case, that although such a contract does restrict the freedom of the supplier and therefore is in restraint of trade, if the terms are reasonable it goes no further than is reasonably necessary for the protection of the company and is therefore not so unreasonably in restraint of trade as to justify the court in declaring it void. “Such a contract with all the other shareholders is to the advantage of each single shareholder because it ensures for him the highest possible price for his product. There is nothing in such a contract against the public interest. It is to the advantage of the public of this country that so important a national industry as the dairy industry should be fostered and that co-operative dairy companies should have the power to bind their members in any reasonable way and by any reasonable contract to make their supply continuous, so that they may be able to produce the greatest value for the lowest possible overhead charges and thus prosper. The prosperity of this country depends very largely on the prosperity of the dairy industry.”

HAD FAILED TO PROVE CONTRACT

At the hearing of the case, continued the judge, model articles of association for co-operative dairy companies prepared for the National Dairy Association were produced. These contained a provision similar to article 55 of the Eltham company, which no doubt had been widely adopted. He could see no reason why co-operative dairy companies should not make valid contracts of this nature with their members. But. in his opinion, where a company wished to rely on the terms of one of its articles as a contract with its members it must prove aliunde that such a contract was made. The onus ssemed to him to be on the company. The contract must be proved, just as a contract with a stranger would have to be proved by the company in order to rely on it. The mere proof of the article was not by itself sufficient proof of the contract. In his opinion the Eltham company had failed in its proof of a contract with Johnson in terms of article 55. It could not prove that he was present at either of the meetings when the article was adopted, or that the article was ever brought to Johnson’s notice. He accepted Johnson’s oath that he never knew of it until he had already incurred the penalty. It was clear that Johnson agreed to the contract in article 8, which provided that the whole of the net profit, after allowing for dividends, should be paid to suppliers who held the necessary number of shares. It was equally clear that he agreed to the alteration of 1912 with reference to the taking up of extra shares. But there was no evidence whatever to show that he agreed to any further alteration of his contract with the company. Consequently he was not bound by any attempted alteration of that contract by the company. A contract could not be varied except with the consent of all the parties. . “I must therefore hold that the milk supplied by Johnson to the company during the season 1924-25 was supplied under the contract evidenced by article 8 of the original articles as amended in 1912,” said the judge, “and under that contract Johnson is entitled to the whole of his share of the net profits. “Whether this particular contract, if it has been found that it was a contract agreed to by Johnson, would have been void as in unreasonable restraint of trade, I expressly refrain from deciding. There are other articles that have been referred to which, it is argued, read in

conjunction with article 55, would render such a contract void, as being in unreasonable restraint of trade. I have not quoted those articles or considered closely their effect because such a course is unnecessary for the deciding of this ease. All I have said is that if framed m a reasonable manner a contract with a shareholder that he shall give his whole supply of milk for a season to the company, under pain of the company lorfeitin’g a part of the price, would not be void as being an unreasonable restraint of trade.

At the hearing Mr. A. Chrystal'l appeared for Johnson and Mr. J. L. Weir for the Eltham Co-operative Dairy Company.