Scottish Court of Session Decisions

The following narrative of this case is taken from the Note of the Lord Ordinary (Curriehill.):—“This action is raised by Robert Cassels, one of the partners of the Glasgow Iron Company, against James Reid Stewart, the only other remaining partner of said Company, concluding for declarator That an agreement dated 19th May 1863, entered into by the defender with the deceased James Reid, iron merchant in Glasgow, for the purchase of the said James Reid's whole right and interest, as at 31st May 1859, in the Company concern carried on in Glasgow under the name of the Glasgow Iron Company, was made and entered into by the defender for and on behalf of the said Glasgow Iron Company, and the pursuer and defender as the whole remaining partners there of, or must be held to have been so made and entered into; and further …. . that the partnership accounts of the said Company, from 31st May 1859 to 31st May 1870 inclusive, should be made up and settled on the footing that the said purchase was made for behoof of the said Company and the pursuer and defender equally as the whole remanent partners thereof.' There is also a conclusion for the reduction of the docquets or minutes of approval appended to the balance-sheets of the Company as at 31st May 1860 and 31st May 1864 and the intervening years, bearing to be signed by the said James Reid, the pursuer, and defender, on the footing that these three persons were all interested in equal shares at these respective balances.

“The circumstances out of which the action has arisen are shortly as follows:—The Glasgow Iron Company was originally constituted by contract of copartnership to endure for a period of seven years after 15th May 1845. The original partners were the late James Reid, ironmonger in Glasgow; James Reid Stewart, his nephew, the defender; Robert Cassels, the pursuer (then clerk to the Monkland Iron and Steel Company in Glasgow); and Noah Meese (then manager of the Govan Ironworks). The capital stock of the company was to be £15,000, whereof the said James Reid and the defender were each to contribute £5500, the pursuer £3000, and Noah Meese £1000 James Reid and the defender were each to have 5–15th shares. Notwithstanding the contemplated duration of the partnership for seven years, it was inter alia provided that it should be in the power of any partner at the end of five years from Whitsunday 1845 to retire and cease to be a partner on giving to the other partners six months' previous notice in writing of his intention so to retire, and that in that event it should be in the power of the remaining partners either to continue and carry on the partnership for the full period of the seven years originally contemplated, and so long thereafter as should be mutually agreed upon, or to wind up the concern.

By the second article it was inter alia provided that ‘it shall not be in the power of any of the partners to assign all or any part of his share or interest in the capital stock or profits of the concern to any person or persons, or to give them a right to inspect the Company's books, or to interfere in any way with the business of the Company; and should any such assignation or other conveyance be granted, or right given contrary to this stipulation, the same is hereby declared to be null and void and of no force, strength, or effect so far as regards the Company or other individual partners, who shall not be obliged to pay any attention thereto.’ By the fifth article it was provided that the books should be brought to a bal ance by the pursuer on the 1st June annually; that copies of the balance-sheet should be entered in the books of the Company, and authenticated by the signatures or written assent of all the partners, and should regulate and constitute their respective rights and interests as at 1st June annually, and the sums to be paid to their heirs or creditors in the event thereinafter provided for. By the sixth article it was provided that in case of the death of any solvent partners, his heirs or next of kin might, with their consent, be assumed as partners in lieu of the deceased by the surviving partner or partners, who should, nevertheless, have the option of retaining the whole of the Company's capital stock, debts, property, assets and effects upon granting bills to the heirs of such deceasing partner or partners for the amount or value of such deceasing partner's interest in the concern as the same stood at the balance struck immediately before such death, under deduction of all sums drawn by the deceasing partner from,

_________________ Footnote _________________

* Decided May 22

Page: 558↓

and debts due by him to, the Company between such balance and death.

The seventh article is as follows:—‘And in like manner, in the event of any of the partners retiring from the concern as hereinbefore provided, or becoming insolvent, the remaining or solvent partners or partner shall have power to assume such other person or persons into the room and place of such retiring or insolvent partner or partners, and the remaining or solvent partner and partners shall nevertheless have the same option of retaining the Company's stocks, debts, property, assets and effects, upon granting bills to the retiring partner or partners, or to wind up the concern in manner and subject to the same conditions, terms, and declarations as is provided in the case of a deceasing partner by the immediately preceding article hereof.’

By the tenth article it was provided that the partners should at all times have power by mutual consent to make future regulations for the management and extension of the business, which, when entered in the Company's sederunt book, and subscribed or assented to in writing by a majority in numbers of partners, were to be equally binding as if they had been contained in the contract.

By minute of agreement, dated 18th January 1847, the partners assumed James Henderson Robertson as a ‘partner. The capital stock was increased to £30,000, and it was agreed that the partners should be interested in the business as follows, viz., James Reid and the defender to the extent of 9–30th parts each, Noah Meese and the pursuer to the extent of 3–30th parts each, and James Henderson Robertson to the extent of 6–30th parts. In all other respects the original contract was ratified, approved of, and confirmed.

The Company went on for many years unchanged, but in 1850 Noah Meese retired, and his interest was, taken over by the Company and divided between the remaining partners. In 1852 the pursuer acquired one of Mr Reid's thirtieth shares by an arrangement which was not reduced to writing at the time, but was ratified by the Company by minute dated 8th October 1858, whereby the balance-sheets from 31st May 1851 to 31st May 1858, which had not been previously docquetted, were approved of and subscribed by all the partners. The pursuer's salary, which had been originally £250, was increased to £500 per annum, taking effect retrospectively as from Martinmas 1852.

In 1860 Mr Robertson retired, and his interest was taken over by the three surviving partners, in terms of article 7th of the contract of partnership, they paying him out, as the price of his share, the sum of £38,201, 0s. 4d., being the amount at his credit as at the previous balance of 1859, and in addition thereto a bonus of £3000, the whole being made payable in fourteen half-yearly instalments, with interest at 5 per cent. from 31st May 1859. It was further agreed that from the date of Mr Robertson's retirement each of the three remaining partners, i.e., James Reid and the pursuer and defender, should have equal interests in the business.

The terms of Mr Robertson's retirement appear to have been arranged between him and the pursuer, and they were subsequently adopted and ratified by the whole remaining partners. It appears, however, that Mr Reid, on learning what had been done, said to his nephew that there was no occasion for giving Robertson a bonus, and his retirement was voluntary; but he never formally objected, and, as I have said, he ratified the arrangement. It is at this point that the controversy between the pursuer and defender begins. The pursuer alleges (1) that the defender reported to him that Reid was dissatisfied with the arrangement made with Robertson, and had expressed his desire, or at least his willingness, himself to retire on similar terms; and (2) that he (the pursuer) thereupon authorised the defender to negotiate for the purchase of Mr Reid's interest in the business for the Company on these terms; (3) that the defender agreed to negotiate the purchase on that footing; and (4) that the defender did, in point of fact, so purchase his uncle's interest for behoof of the Company.”

The pursuer averred that the defender had purchased Mr Reid's share on lower terms than he had authorised him to purchase it for the company, and that the fact of the purchase was concealed from him till after Mr Reid's death. He further averred—“(Cond. 12) By the said agreement Mr Reid transferred his share in the said company to the defender. It made the partners two in place of three. It in reality gave the defender the practical control of the business by means of his command of Mr Reid's vote. It deprived the pursuer of Mr Reid's advice as a party interested in the same way as before in the business. It prevented him exercising the right of purchase of Mr Reid's share which he had in the event of Mr Reid's death under the then existing terms of the copartnery.”

In answer to this it was explained that Mr Reid continued a partner till his death, and took as much interest in the concern after the agreement as before, and that at his death his shares in the concern were divided equally between the pursuer and defender. It was admitted that after Mr Reid's death the business of the concern had been carried on on the footing of an equal division.

The minute of agreement between the defender and Mr Reid relative to the purchase of the latter's share was to the following effect:—Reid, the first party, agreed to sell to Stewart, the second party, his whole right and interest in the Glasgow Iron Co. as the same stood on 31st May 1859, the price to be £62,400, being the amount at first party's credit at that date, to be paid as was convenient for second party, but it must be paid within 20 years, the second party to be entitled to profits on the said share after above date. After various provisions in regard to interest, it was provided that the first party should not ask for security for payment of the price except in the event of the death of the second party. It was provided (seventh) that “the right and interest or stock hereby sold may remain in the first party's name, or it may be transferred over to the second party at any time he may require it.”

It was maintained on behalf of the second party that this agreement was merely part of Mr Reid's testamentary dispositions.

The pursuer pleaded that he was entitled to decree—“(1) In respect the defender agreed with the pursuer to endeavour to purchase Mr Reid's interest on behalf of the Glasgow Iron Company, and thereafter succeeded in purchasing the same. (2) In respect the defender, as a partner of the said company, was not entitled to purchase with

Page: 559↓

out the pursuer's consent Mr Reid's interest for himself, or otherwise than on behalf of the said company.”

The defender's third plea was—“The agreement in question having been lawfully entered into by the defender for his own behoof, the pursuer has no interest in or right to claim the i benefit of the same.

The Lord Ordinary ( Curriehill), after a proof pronounced an interlocutor in which he assoilzied the defender. His Lordship added the following

Note.—[After the statement of facts ut supra]—If these statements are true, there is an end of the case, because the defender would in that view be bound by paction to communicate to his partner the benefit of his purchase. On this branch of the case the pursuer depends solely upon his own deposition in the witness-box, which not only is not corroborated, but is contradicted by the defender. So far as credibility is concerned, I do not think that from the demeanour of the parties either of them should be regarded as more or less trustworthy than the other. It appears to me, however, that the probabilities of the case are against the pursuer. In the first place, even if Mr Reid had ever really desired to leave the concern on terms such as Robertson had got, he did not in point of fact leave the concern at all; and the consideration given by the defender to his uncle for the right to compel the latter to retire was (as will afterwards be explained) far less than that received by Robertson. In the next place, Mr Reid by his actings in the matter showed very clearly that he did not mean to dispose of his interest to the Company on any terms, because it is clearly proved that he desired that the arrangement with the defender should not be communicated to the pursuer—and consulted his law-agent as to the necessity of making such a communication, and was advised that there was no such necessity. And in the last place, if the pursuer had really understood or believed that Reid seriously wished to retire in favour of the company, and if the pursuer had really, as he says he did, authorised the defender, and agreed with him to buy out Reid for behoof of the company, it is inconceivable that during the ten years which elapsed before Mr Reid died the pursuer should never once have mentioned the matter to the defender or asked him what progress he was making with the negotiation. In this state of the evidence, I must hold that the pursuer has failed to prove the averments upon which his first plea-in-law is founded.

But this second plea-in-law is of a different kind, and raises questions of some delicacy and difficulty. The plea is that ‘the defender as a partner of the said company was not entitled to purchase, without the pursuer's consent, Mr Reid's interest for himself or otherwise than on behalf of the said company.’ Now, what was done in point of fact is fully set forth in the minute of agreement between Reid and the defender, dated 19th May 1863, whereby, on the terms and conditions therein specified, Reid agreed to sell, and sold to the defender (his nephew), his whole right and interest in the company as the said right and interest stood on the 31st day of May 1859. By the 1st article the price was fixed at £62,400, being the amount standing at Reid's credit in the books of the concern as at the said 31st May 1859, to be paid with interest within twenty years from the date of the agreement, at such times and in sums as might be convenient for the defender. By the 2d article the defender was to be entitled to the whole profits that had accrued upon Reid's right and interest in the concern from 31st May 1859, and that might accrue thereafter on the same. By the 3d and 4th articles it was provided that the interest of the price from May 1859 to March 1863, amounting to £13,993, 2s. 9d., should be paid to Reid at the term, and that the interest after that term, at the rate of 4 per cent., should be paid to him half-yearly. By the 6th article it was agreed that during the life of the defender he should not be required to find security for the said price or interest, but that in the event of his death it should be incumbent upon his representatives to grant, if required, security for whatever sum might then be due and owing. And the 7th article is in the following terms:—‘The right and interest or stock hereby sold may remain in the first party's (i.e., Reid's) name, or it may be transferred over to the second party at any time he may require it.’

The contention of the defender is that this transaction between him and his uncle was not truly of the nature of a purchase by him of his uncle's share in the partnership as a going concern, so as to increase the defender's interest in the company from one-third to two-thirds, and was not an assignation of Reid's share to the defender for the purpose of enabling the defender to take Reid's place in the company, but was truly part of his uncle's testamentary arrangements. He was the only nephew of Mr Reid, who appears to have had a warm regard for him; and it is proved that Reid, instead of making the defender one of the beneficiaries under his last will and testament, intended by this inter vivos arrangement to confer during his own life an immediate benefit upon the defender; and that an immediate benefit was so conferred upon the defender is undoubted, because at the date of the agreement there was a sum of accrued profits of at least £25,000 at the credit of Reid over and above the price of £62,400, which was the balance standing at his credit in the company's books at the date of Robertson's retirement on 31st May 1859. The profits, moreover, were annually increasing, and amounted to a very large sum at the death of Reid in 1870. It is quite clear that if Mr Reid had by his settlement bequeathed his interest in the company to the defender, whether gratuitously or for an onerous consideration, such an arrangement could not have been objected to by the pursuer. Now, does it make any substantial difference that by this private arrangement between the uncle and nephew the latter became entitled during his uncle's lifetime to all the stock and profits belonging to his uncle? I think that question must be answered in the negative.

In the first place, Mr Reid did not in consequence of the agreement cease to be a partner in the company. On the contrary, he continued to be a partner, and apparently an active partner, until his death in 1870. It is true that by the agreement he had put it in the power of his nephew to compel his retirement at any time. But that power was never exercised, and if it had been exercised by the defender during his uncle's

Page: 560↓

lifetime the result would simply have been that the pursuer and defender, as the remaining partner, would then have been obliged to pay out to Mr Reid the amount standing at his credit at the immediately preceding balance, or the company would have been dissolved and woundup, in which case the full sum standing at Mr Reid's credit at the date of dissolution would have been paid to him. Under the agreement, no doubt Reid would have been bound to pay the amount so received by him to the defender; but that is a matter with which, in my humble opinion, the pursuer would have had no concern, unless, indeed, he could have shown that it was illegal for the defender to enter into such an agreement. But, as I have said, the power was not exercised by the defender, and Reid remained a partner until his death, and in terms of the 6th article of the contract of copartnership the amount at his credit at the preceding balance became then payable to his representatives, and so far as the pursuer is concerned it is of no moment whether these representatives acquired Reid's interest by an onerous deed inter vivos, by a mortis causa settlement, or as intestate succession. In each case Reid's share had to be paid out by the company, and the pursuer and defender, as the sole remaining partners, might either dissolve the concern or continue the business. They chose the latter course, each having an interest to the extent of one-half.

But the defender says that the transaction was illegal—first, because it is prohibited by the contract of copartnership, and, secondly, because it is in itself a fraud upon the company. As to the first objection, which is founded upon the clause in the second article of the contract prohibiting the partners from assigning their shares, my opinion is that the objection is not well founded. The object of the prohibition was to prevent any partner from violating the delectus personœ which is involved in every partnership, by assigning his share without the consent of the other socii, to the effect of introducing a stranger into the concern, who should have right to inspect the books or interfere with the business of the company. But the clause does not declare such an assignation to be absolutely null and void, but merely ‘so far as regards the company or other individual partners, who shall not be obliged to pay any attention thereto.’ In other words, as regards the assigning partner and his assignee, the transaction may be binding and effectual, but the company and the other partners may, if they please, refuse to give effect to the assignation by refusing to admit the assignee into the company. It would, in my humble opinion, be an unwarrantable straining of the words of the contract to hold that on the death or retirement of the assigning partner the remaining partners, or any of them, would be entitled to refuse to pay out the balance at the credit of the assigning partner merely because he had assigned or become bound to pay that balance to a stranger. Still less would the company or other partners be entitled to object, in virtue of this clause of the contract, to pay such balance to a copartner to whom the same had been assigned, seeing that such copartner had already an interest in the concern, and was entitled, irrespective of the assignation, to inspect the books in his own right, and to take part in the management of the business. Indeed this contract does little more than declare the common law applicable to such cases. The law is nowhere better stated than in Erskine, III. iii. sec. 22:—‘As partners are from a delectus personce, or the reciprocal choice they make of each other, united in a kind of brotherhood, no partner could by the Roman law transfer his interest or share in a society to a third person without consent of the company—L. 19, 59, pr. Pro. soc.; but copartneries, even private ones, may be now so constituted by a special article for that purpose that the partners are left at liberty to transfer their shares to whom they please. If any of the partners shall assume a third person into partnership with them, such assumed person becomes partner, not to the company, but to the assumer—L. 19, 20, eod. tit. The company are not bound to regard the second contract formed by the assumption, which is limited to the share of the partner assuming. He still continues, with respect to the company, the sole proprietor of that share, and must sustain all actions concerning it.’ Thus it appears that although a partner may not communicate his interest in the concern to a third party, to the effect of intruding that party into the company, the transaction is in itself legal and will receive effect as between the parties to the arrangement, although the company may refuse to recognise the third party except through their own partner. Such, I take it, was the position held by the defender under bis agreement with Reid.

But the defender says, in the second place, that although such an arrangement might not have been expressly prohibited by the contract, it was unlawful for the defender as a partner of the company to make such an agreement for his own individual benefit; that he must be held to have done so for behoof of the company; and that he must now communicate that benefit to the company. The law of Scotland and the law of England do not differ as to the general rule upon which the defender here founds, and which is thus stated by Lindley in his Treatise on Partnership, vol. i. p. 571:—‘Good faith requires that a partner shall never obtain a private advantage at the expense of the firm. He is bound in all transactions affecting the partnership to do his best for the common body, and to share with his copartners any benefit which he may have been able to obtain from other people, and in which the firm is in honour and conscience entitled to participate— semper enim non id quod privatim interest unius ex sociis servari solet, sed quod societati expedit.’ There are two modes in which more especially partners attempt unfairly to acquire gain at the expense of their copartners, viz., (1) by directly making a profit out of them; and (2) by appropriating to themselves benefits which they ought to have acquired, if at all for the common advantage, for themselves and others.’

It is under the second of these heads that the pursuer would place the transaction of which he now complains. But as I understand the law, the private benefits which it discountenances are those which are derived from the acquisition by an individual partner—whether clandestinely or openly—of property in which the company is interested. Any such property acquired by him during the subsistence of the company is held to be acquired for behoof of the company. The application of this rule where a partner has before

Page: 561↓

the dissolution of the company obtained in his own name a renewal or extension of a lease held by the company is illustrated by the well-known English case of Featherstonehaugh v. Fenwick, 17 Vesey 298, and the recent case in this Court of M'Niven, 7 Macph. 181. But the present case appears to me to be entirely different. The subject-matter of the agreement is entirely out with the scope of the Company business. It relates exclusively to the stock and profit belonging to one of the individual partners, who is communicating these on extremely liberal terms to his own nephew, who no doubt happens to be also a partner in the concern, but who does not thereby acquire any advantage over the Company or the remaining partner, or make any profit which the Company or remaining partner would have made if there had been no such agreement. I fail to see how it can be maintained that the share of the stock and profits which Mr Reid thus handed over, substantially as a gift, to his nephew is a benefit ‘in which the firm is in honour and conscience entitled to participate.’ It is absurd for the pursuer to maintain that by the arrangement with his uncle, the defender, instead of having only a third share of the business, virtually held two-thirds, and had thereby, and by having the control of Mr Reid's vote, a preponderating influence in the management. In the first place, the pursuer cannot condescend upon a single instance in which that alleged preponderating influence was ever used or felt at all, still less to the prejudice of himself or the concern. Indeed, he admits that on no occasion did any question arise requiring to be put to the vote of the partners. In the second place, Mr Reid remained a partner so long as he lived; and it was undoubtedly his interest after 1863, as much as it ever was previously, to see that the business was conducted advantageously for all concerned, both because he was liable to the public for all the obligations of the Company, and because upon the continued prosperity of the Company depended his chance of payment by the defender of the sum of £62,400 stipulated for in the agreement. And, in the third place, in point of fact the business continued to be extremely prosperous; for although the figures were, for obvious reasons, not disclosed at the proof, the parties concurred in stating that the sum appearing at Mr Reid's credit at the balance immediately preceding his death in 1870 very largely exceeded the said sum of £62,400, which was the amount at his credit on 31st May 1859, and for payment of which by the defender he transferred his interest to him. I strongly suspect that this circumstance has been the origin of the present claim by the pursuer, taken in connection with the undoubted fact that the agreement was concealed from and not communicated to him during Mr Reid's lifetime, and only came to his knowledge accidentally about a year after Mr Reid's death. But if the agreement was not in itself legal, and if it was not, as I think it was not, a duty incumbent on the defender or Mr Reid to communicate it to the pursuer, the concealment of the transaction cannot aid the pursuer's claim.

On the whole matter, therefore, I am of opinion—(1) that in point of fact Mr Reid's interest was not purchased by the defender in pursuance of any arrangement between the pursuer and him that it should be purchased for behoof of the Company; (2) that in point of fact it was purchased by the defender solely for his own behoof; (3) that such purchase was not prohibited by the contract of copartnership; and (4) that the benefit which the defender undoubtedly acquired by the purchase is not one which he is in law, honour, and conscience bound to communicate to the Company, or to the pursuer as the only other partner hereof. If I am right in these views, it follows that the defender is entitled to absolvitor from the whole conclusions of the action, with expenses.”

The pursuer reclaimed, and argued—(1) Mr Reid's share was in point of fact acquired by the defender in terms of an arrangement with the pursuer that he should acquire it from the company. (2) It was in breach of the contract of copartnery in Mr Reid to assign his share as he did without the knowledge of the other partners. (3) The subject-matter of the agreement was one in which the Company was interested, and by common law a partner was barred from acquiring it for himself, but was bound to do so for the Company. The first question was a matter of fact, and it was submitted that the reclaimer's view of it was proved. In regard to the second point, there was nothing in the contract between Reid and Stewart to indicate that it was other than an absolute contract of sale, which was directly forbidden by the contract of copartnery when without the knowledge of the other partners. It was illegal in a partnership to assign ab ante a partner's whole future interest or profits in a concern; it invested the assignee with the interest of a partner. The qualifications of partnership were—(1) patrimonial rights, the ownership of stock, and participation in profits and losses; (2) duties—to give the best of his time or skill in aid of the business, and not to acquire any benefit for himself from his position as a partner. Applying these tests, Reid had ceased to be a partner under this minute of agreement. (3) At common law this agreement was illegal. The passage in Erskine quoted infra, implied that an assignation of one's right in a partnership could not be granted unless there was an express power to this effect in the contract, and that a partner could not assume another in place of himself. Lindley (i. 229) said that a transfer of interest was a cause of dissolution. The fact that Stewart was already a partner made the matter worse, for it gave opportunities for concealment, and upset the balance of power in the concern. A partner must in all cases communicate the benefit of his influence, business connection, &c., to the company, both within and without the company's business; the principle of good faith simply was that persons in a fiduciary relation getting a benefit should be made to communicate it.

Authorities—Ersk. iii. 3, 22; Lindley, i. 229, and 569–577, and cases there cited; Russel v. Austwick, Nov. 1826, 1 Simon 52; Featherstonhaugh v. Fenwick, 17 Vesey 298; Clegg v. Clegg, 3 Giff. 322; Eaglesham & Co. v. Grant, July 15, 1875, 2 R. 960.

Argued for respondent—The agreement here between Mr Reid and Mr Stewart was quite legitimate; it was merely part of Mr Reid's testamentary dispositions. He did not withdraw himself from the firm entirely; though he gave over his share from a certain date, he remained bound to do all he could for the firm—give his advice, &c., just as previously. The bargain in substance came to this—Mr Reid said, “You will get my share in the

Page: 562↓

concern at my death, and I undertake that I wont retire during my life unless you ask me. “— Lonsdale Hematite Iron Co. v. Barclay, &c. Jan. 27, 1874, 1 R. 417.

Authorities—Quoted supra, and Kelly v. Hutton 1868, L.R., 3 Chan. App. 703; Lindley, i. 654–698.

At advising—