APPEAL ALLOWED.

Waipa Post, Volume XXIV, Issue 1425, 10 November 1923, Page 5

APPEAL ALLOWED.

FAILURE TO SUPPLY MILK. DAIRY COMPANIES AND SUPPLIERS. (By Telegraph. Press Association.) WELLINGTON, Friday. The Appeal Court (Their Honours Mr Justice Hosking, Mr Justice Herdman, Mr Justice Salmond, and Mr Justice Reed) were unanimous in holding yesterday that the appeal of Stephen Shalfoon against the Cheddar Valley Co-operative Dairy Company, Ltd., should be allowed. The appeal was from a judgment of the Chief Justice (Sir Robert Stout), affirming a judgment of a stipendiary magistrate for £4O against appellant for his alleged default in not complying with clause 17 of respondents’ articles of association. The clause was as follows: “Every, shareholder shall supply to the company the whole of the milk or cream produced on his farm (except that required for his own household and farming purposes) until the share capital of such member is fully paid up; failing which he shall pay to the company as liquidated damages the sum of £1 per cow for each and every season or part of a season he fails to supply milk to the company.” Appellant contended, inter alia, that the judgment was erroneous in holding that the clause “was not unlawful and was not in undue restraint of trade.”

The respondent company is a cooperative dairy company incorporated under the Companies Act, 1908, and established for the purpose of manufacturing butter and cheese from milk supplied from the dairy farms of the shareholders, and of dividing its profits among the shareholders in proportion to the quantities of milk so supplied by them. The appellant is the owner of a dairy farm and is a shareholder in the company, having acquired his shares by allotment from the company, clause 17 of the articles being in force at the date of that allotment. He failed to supply milk to the company in pursurance of that clause, and the company sued him in the Magistrate’s Court for the liquidated damages prescribed by the articles. Two distinct questions of law were raised by the appeal, namely—(l) was clause 17" of the articles valid as a regulation of the company, and therefore binding upon appellant as being a shareholder in the company? (2) If not. was it valid as a contract made between the company and appellant. and therefore binding upon appellant as being a party to the contract?

Mr Justice Salmond said that there were two distinct ways in which an obligation might come into existence as between a company and one of its shareholders. “In the first place,” he said, “it may have its source in a regulation validly made by the company and inserted in the articles of association, in pursuance of the authority conferred by sections 22 and 122 of the Companies Act, 1908. In the second place, it may have its source in a contract made between the company and the individual shareholder. This distinction is of practical importance for several reasons. In the first place an obligation imposed by a regulation is not merely personal, but is appurtenant to the shares of the company, so as to run with those shares in the hands of successive owners, and to bind all shareholders for the time being; but a contractual obligation is purely personal; and binds only the individual shareholder who has become a party to the contract, and cannot be made to run with the shares as appurtenant thereto in the hands of successive owners. In the second place, a regulation can always be altered or repealed by the company, and the rights and obligations created thereby may be thus modified or destroyed; whereas a contract between the company and a shareholder can only be altered or cancelled by the mutual consent of both parties. In the third place a regulation to be valid must be within the scope of the legislative authority given to a company by the Companies Act over its shareholders; whereas a contract made between a company and a shareholder is subject merely to the general provisions of the law of contract, a company being entitled to, make any contract with a shareholder which it may lawfully make with an outsider. A shareholder may therefore, take upon himself by a contract with the company many obligations which can not be imposed upon him by the company by the making of regulations.” Mr Justice Herdman said that but for the fact that the memorandum of association of the respondent company provided that one of the objects of the company was to establish cheese factories, dairy factories, and creameries at Kutarere and at any other place or places in New Zealand, he would have been disposed to hold that article 17, if for other reasons it was in restraint of trade, did not create a restriction which exceeded what was reasonably necessary for the protection of the covenantee. If this blemish were removed from the constitution of the company he would hesitate to hold that the article was as objectionable as the rules which were considered in an earlier case. Mr Justice Reed thought the plain explanation was that the unreasonable nature of the clause was mainly due to faulty draughtsmanship and the frequence of the presence of. the clause or one closely resembling it in articles of dairy companies, was due, not to the considered opinion of farmers, but to the careless and unthinking copying by the draftsman of the articles of the nearest dairy company. Mr Justice Hosking concurred and the appeal was accordingly allowed.