Case Study: Daimler Company Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd.

By Mohammad Adil Ansari 10 Minutes Read

Citation: [1916] 2 AC 307

Court: House of Lords

Date of judgment: 15th January, 1915

Bench: Earl of Halsbury, Viscount Mersey, Lord Kinnear, Lord Atkinson, Lord Shaw of Dunfermline, Lord parker of Waddington, Lord Sumner, and Lord paramour.

Facts

• Continental Tyre and Rubber Co. was incorporated under the companies act on March 29, 1905 with a capital of 10,000L which was then subsequently increased to 25,000L in fully paid 1L in shares and had its registered office in London.
• The company was formed for the purpose of selling motor car tyres made in Germany by a German Company.
• The German Company held 23,398 shares in the respondent company and the remaining shares, except one, were all held by directors who were all German citizens.
• The remaining one share was held by a Mr. Wolter, the secretary of the company, who was born in Germany but was residing in the United Kingdom and had become a naturalized citizen of the British Crown.
• Three of the four directors of the company were residing in Germany and one of the directors was residing in Britain who also fled the country when the war was proclaimed.
• On October 23, 1914, an action was initiated by the respondent company for a debt of 5605L due for principal, interest, and notarial charges on three bills of exchange drawn by the respondent and accepted by the appellant in payment for goods supplied to Daimler Co. by Continental Tyres and Rubber Co. before the outbreak of first world war.
• Dailmer claimed that paying money or trading with an enemy alien during the proclamation of war would contravene common law and also statutory law.^[1]
• The respondents sued the appellants for the payment of outstanding dues.

Decision of the Lower Court

The lower court ruled that Continental was not regarded as an enemy of the king for trading purposes, since all enemy officers lose their positions upon becoming enemies, and the shareholders’ status has no impact on this determination.

Decision of the Court of Appeal

The Court of Appeal affirmed the judgment of the lower court. Lord Reading CJ, Cozens-Hardy LJ, Phillimore LJ, Pickford LJ and Kennedy LJ, affirmed the decision too, and held that there would be no offense.^[2] They stated that the company did not change its character because of the outbreak of war. Lord Reading CJ gave the reasoning “Company is a living thing with a separate existence which cannot be swept aside as a technicality. It is not a mere name or mask or cloak or device to conceal the identity of persons and it is not suggested that the company was formed for any dishonest or fraudulent purpose. It is a legal body clothed with the form prescribed by the legislature.”^[3]

Lord Justice Buckley was the only one who delivered a dissenting judgment. Daimler appealed in the House of Lords.

Judgement

After considering the case, the House of Lords ruled that, even though the company is an artificial entity distinct from its owners, it will acquire hostile characteristics if any of its majority owners or shareholders are nationals of a hostile country.

Further Lords also reversed the judgment of the court of appeal. The action of Continental Tyre and Rubber Company (Great Britain) Ltd. was dismissed and all orders made were discharged.

The court held that a company’s character cannot be influenced by the character of its individual shareholders in times of peace or conflict. However, when evaluating the company’s character during a war, it is crucial to take into account any agents or individuals that are carrying out orders from such stockholders who are from an enemy nation.

Key Legal issues discussed

• Whether the identity of a company should be judged solely based on its place of incorporation or the nationality of its shareholders and directors?

Here in the case, house of lords held that a corporation, as an artificial legal entity, has no physical presence and exists solely within the framework of the law. It lacks a body, parts, or emotions, cannot bear arms, and cannot participate in wars. It is incapable of loyalty or disloyalty and cannot commit treason. A corporation cannot be considered a friend or an enemy. Separate from its members, it has no thoughts, desires, or intentions because its only mind is that of its members. Lord Parker said, “I do not think, however, that it is a necessary corollary of this reasoning^[4] to say that the character of its corporators must be irrelevant to the character of the company; and this is crucial, for the rule against trading with the enemy depends upon enemy character. Just like a natural person can have an enemy character, so can a legal person.” The House of Lords held that the identity of a company should not be judged solely based on its place of incorporation or the nationality of its shareholders and directors but on the circumstances and situations in the country. Since it was a time of war, a company, though established in the UK, will be seen as an enemy alien if its directors and shareholders are, in the eyes of law, an enemy of the British Crown.

• Whether payment to a company, whose shareholders and directors are enemy nationals, constitutes trading with the enemy?

Yes

Lord Atkinson said “It is well established that trading with the most loyal British subject, if he be resident in Germany, would, during the present war, amount to trading with the enemy, and be a misdemeanor if carried on without the consent of the Crown; the reason being that the fruits of his action result to a hostile country and so furnish resources against his own country.”^[5]

He further stated that the same principle would presumably apply to a trading company resident in an enemy country. Due to the proclamation of war, the residence of the respondent company was of necessity a vital matter for consideration.[6]

Lord Parker recited, “The acts of a company’s organs, its directors, managers, secretary, and so forth, functioning within the scope of their authority, are the company’s acts and may invest it definitively with enemy character.” He further reasoned that the considerations which govern civil liability and rights of property in time of peace differ radically from those which govern enemy character in time of war. The rule against trading with the enemy is a weapon of self-protection.  Lord Parker also referred to an American case and recited that the court, for certain purposes, must look behind the artificial persona – the corporation and take account of and be guided by the personalities of the natural persons, the corporators.^[7]

The Earl of Halsbury LC, Viscount Mersey, Lord Kinnear, and Lord Sumner agreed. Lord Shaw and Lord Parmour concurred with the outcome but dissented on this particular point.

^[1] Trading with Enemies Act, 1914, s. 3(1).

^[2] [1915] 1 KB 893, decided on 15 January 1915

^[3] Janson v. Driefontein Consolidated Mines, Ltd. (H.L.(E.) A.C. 1902

^[4] Lord’s Journal, June 30, 1916

^[5] M’Connell v. Hector 3 Bos. and P. 113.

[6] Janson v. Driefontein Consolidated Mines, Ltd. (H.L.(E.) A.C. 1902.

^[7] Bank of the United States v. Deveaux 9 US 61 (1809).

Mohammad Adil Ansari

Founding Member & Editor in Chief @LegalWires.