Cork rail case 'clever and progressive'

MY FAVOURITE CASE:Professor Blanaid Clarke, the newly appointed McCann FitzGerald chair of corporate law at Trinity College Dublin

What is your favourite case?

The 1883 case of Hutton v West Cork Railway Co. It’s still quoted a huge amount – if you pick up any company law book you’ll see a reference to it. It deals with several key corporate governance issues.

Essentially the UK Court of Appeal held that a payment of £2,550 to officers and directors of the West Cork Railway Co was invalid. At the time, the business had been sold and the company was being dissolved. The court said the payment wasn’t “reasonably incidental” – in other words substantially related – to the carrying on of the company’s business for “the company’s benefit”.

Lord Justice Bowen, who was famous for applying legal principles to business in a very pragmatic way, said: “The law doesn’t say that there are to be no cakes and ale, but that there are to be no cakes and ale except such as are required for the benefit of the company.”

That’s why this is such a famous case – Lord Justice Bowen ruled that you can look after your employees and other stakeholders, as long as it is to the benefit of the company.

He went on to explain what he meant, saying that it was acceptable for an employer to “send porters to have tea in the country” at the company’s expense. He then made the point, which gets to the nub of the corporate social responsibility debate today, that “a company which always treated its employees with draconian severity and never allowed them a single inch more than the strict letter of the bond would soon find itself deserted”.

That’s very, very clever and progressive.

Why is it your favourite case?

It’s very useful as a teaching tool. For example you can ask students if they think when Lord Justice Bowen referred to “cakes and ale”, he envisioned six city bankers spending £44,000 on Chateau Pétrus while dining out in London in the halcyon days, and whether that equates to heading off for “tea in the country”. When the judge talked about the payment of £2,550, do they think he contemplated a payment as large as Fred Goodwin’s £16 million pension?

People tend to have gut reactions to these things. If you ask students if it’s justifiable for a company to pay someone a salary of €1 million, they may initially say “absolutely not”.

But if you put it to them that this payment could be linked to the benefit of the company, for example it might increase performance by providing motivation or loyalty or allowing the company to attract a better candidate, they may take a different view as to whether or not it’s acceptable.