Taylor v Reid

The appellants, directors and controlling shareholders of James Marshall & Co. Ltd., appealed to the High Court of Australia from a decision of the Supreme Court of South Australia. The dispute concerned a guarantee provided by the appellants to the respondent, Donald Reid, who was appointed trading manager of the company. The guarantee stipulated that the appellants would ensure dividends on 26,000 ordinary shares transferred to the respondent at a rate of at least 6.5% per annum for the financial years ending 31 July 1927, 1928, and 1929. In September 1928, the appellants and the respondent agreed to sell all ordinary shares in the company, including the respondent's 26,000 shares, to another company. No dividend had been declared for the financial year ending 31 July 1928 prior to this sale. The respondent claimed payment under the guarantee for the year ending 31 July 1928, which the Supreme Court awarded.

The High Court was required to determine whether the appellants were liable under the guarantee for the financial year ending 31 July 1928, given that the respondent had sold his shares before any dividend was declared for that year. Specifically, the court had to consider the meaning of "guarantee dividends on shares" and whether the respondent's continued ownership of the shares was a prerequisite for the appellants' liability. The court also had to assess whether the sale of shares constituted a breach of the warranty and, if so, whether the respondent had suffered any actionable damage.

A majority of the High Court, comprising Knox C.J., Gavan Duffy, Rich, and Dixon JJ., held that the respondent was not entitled to succeed. Their reasoning was that the guarantee was fundamentally based on the respondent's continued ownership of the shares. The term "guarantee" indicated that the appellants' liability would only arise if the respondent did not receive the specified dividend as a shareholder. The phrase "dividends on shares" was interpreted to mean a payment made by the company to a person who was a shareholder at the time the dividend was declared or ought to have been declared. Since the respondent had sold his shares in September 1928, he was no longer in a position to receive a dividend from the company for the financial year ending 31 July 1928, which would ordinarily be declared in November 1928. Therefore, the appellants incurred no liability under their guarantee for that year. Isaacs J., while finding a strict breach of warranty as the sale did not prevent the company from declaring a dividend, concluded that the respondent had suffered no damage, leading to the same outcome.

The appeal was allowed, and the decision of the Supreme Court of South Australia was reversed. The High Court declared that the respondent was not entitled to payment from the appellants under the guarantee for the financial year ending 31 July 1928. The respondent was ordered to pay the costs of the application to the Supreme Court and the appeal.