Scottish Court of Session Decisions

John Innes Wright & Co. were for many years merchants in London and Glasgow. In the spring of 1877 the London firm assumed as a partner Mr John Bell, merchant, Glasgow, and a new contract of copartnery was then entered into between Wright, Bell, and Scott, dated in March 1877, by which it was provided that the new firm should carry on business in London under the name of John Innes Wright & Company, and in Rangoon as W. Scott & Company. Article 3 of the contract provided that “the firm of John Innes Wright & Company, merchants in Glasgow, shall exist as a separate and independent firm, the copartnership hereby established having no concern therewith.” Article 4 provided that certain property in Rangoon called Duniedaw should be copartnery property, and that the cost thereof—including plant, machinery, &c, and expenses—should be borne by the copartnery; and by the same article Scott, in whose name the property then stood, acknowledged and declared that he held it in trust for the copartnery. Article 5 provided that “the partners shall contribute equally, and from time to time as required, the capital necessary for working the business; each sum contributed shall be entered to the credit of the partner paying the same in the books of the copartnership; and each shall be allowed interest on the sum standing at his credit at the rate of 5 per cent. per annum,”—the parties being by article 6 declared to be interested in the business and to share in the profit or loss equally. It was provided that regular books should be kept in Rangoon and in London, and that proper assistants and managers should be appointed to take charge of the business in both places. By article 8 it was provided—“Excepting interest on capital as aforesaid, and working salary as after mentioned, the partners shall not be allowed to draw out capital or profits except of mutual consent, and the profits of each shall be annually placed to his credit.” Article 12 contained the following provision—“Each partner-shall be entitled to subscribe the firm in the proper business of the company; but the partners are hereby prohibited and restricted from using or applying the said firms, or the funds of the company, for any purpose whatever not connected with the business hereby undertaken; and it is hereby especially provided and agreed that the firms hereby established shall not on any account be used as sureties or cautioners for or in giving accommodation to, or on accommodation bills for, or on account of, any person or persons, company or companies, whatever.”

The Glasgow firm of John Innes Wright & Co. were largely indebted to the City of Glasgow Bank. As part security for this indebtedness the bank took bills for £32,000, drawn by John Innes Wright & Co. of Glasgow, and accepted by the London firm of the same name. These bills were six in number, and were drawn at twelve and nine months.

John Innes Wright & Co. of Glasgow, and the partners thereof (Wright and Scott), were sequestrated on 23d October 1878, and this was an action by the bank and its liquidators against Bell, as a partner of the London firm, for payment of four of the above bills (amounting in all to £24,000), the other two having been duly retired at maturity. Mr Bell died while the action was in dependence, and the trustee on his sequestrated estate, Mr Alexander Moore, C. A., Glasgow, was sisted in his place.

The following was the statement of facts for the defender, with the pursuers' answers:—“(Stat. 1) The signature of the drawers of the bills libelled was adhibited by Mr Scott, and the signature of the drawees by Mr Wright. (Ans. 1) Admitted. (Stat. 2) The said bills were drawn and accepted solely for the private purposes of Mr Scott and Mr Wright, and were intended to be handed, and were handed, to the City of Glasgow Bank as a security for large sums, to the amount of which their firm of John Innes Wright & Company of Glasgow had overdrawn their account with the said bank. (Ans. 2) Admitted that the bills were handed to the bank in security of the overdrawn account of John Innes Wright & Company of Glasgow with the bank. Quoad ultra denied. (Stat. 3) No value was received by the said John Innes Wright & Company of London. The said bills were not accepted by Mr Wright in course of the business of the said firm of John Innes Wright & Company of London, and the said acceptances were granted by him wholly in excess of his powers as a partner of the said firm, and in violation of his duties as a partner of that firm. The said acceptances were not made in connection with the business of the said London firm, and the said firm were not, and are not, liable for the same. The defender has been informed, and avers, that they were granted and lodged with the bank in order to present a colourable diminution of the balance due by John Innes Wright & Company of Glasgow to the bank. The said bills are not entered in the books of John Innes Wright & Company of Glasgow, nor were they entered in the books of John Innes Wright & Company of London, and their existence was unknown to anyone connected with the said firm except Mr Wright and Mr Scott until after the stoppage of the said City of Glasgow Bank. In particular, Mr Bell never heard of the said bills until after the stoppage of the said bank. The averment in explanation in the answer is denied.” What follows within brackets in this statement, and also in the answer thereto, and in the pleas-in-law, was added after the record had been closed, as explained in the Lord Ordinary's note, infra—[“With reference to the averments of adoption and homologation made in the answer hereto, the defender refers to the agreement founded on for its terms. Quoad ultra these averments are denied, and it is explained that at the date of the said agreement Mr Bell did not know the object and purpose of the acceptances in question, or the circumstances under which they had been granted. So soon as he came to know the true nature of the bills and their cause of granting, he, by 21st October 1878,

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repudiated liability for said acceptances, both to the bank and John Innes Wright & Company of Glasgow. The first intimation that Mr Bell was alleged to have adopted said acceptances was made at the diet of proof in the cause on the 30th November last, after the death of Mr Bell, which happened on 28th March 1880. It is further explained that Mr Strong's state of affairs was inaccurate in various respects, and did not show the true state of John Innes Wright & Company of London's affairs. (Mr Strong was an accountant in Glasgow who under Mr Bell's instructions examined the affairs of the London copartnery, as is stated infra.) In particular, and inter alia, Mr Strong did not debit the London firm with bills granted and then current for the price of Duniedaw—a property which he entered as one asset worth £12,000, or with £4700 advanced by Mr Bell.] (Ans. 3) Admitted that the bills were endorsed and lodged with the bank to lessen the balance due by John Innes Wright & Company of Glasgow to the bank. Quoad ultra denied, and explained that when the said bills were granted and endorsed John Innes Wright & Company of London were indebted to John Innes Wright & Company of Glasgow to the full amount thereof. [On 8th October 1878, in consequence of the insolvency of Mr Wright and Mr Scott, an agreement was entered into and executed by them and Mr Bell, whereby Mr Wright and Mr Scott withdrew from the business of John Innes Wright & Company of London and William Scott & Company of Rangoon, and made it over to Mr Bell, he undertaking to pay them out their interest. Further, Mr Bell bound and obliged himself ‘to pay the whole debts and liabilities, and liquidate the obligations of the said two firms.’ Before Mr Bell entered into the said agreement he was well aware that the bills now sued for formed part of the debts and liabilities of John Innes Wright & Company of London. He had had several meetings with Mr Scott and Mr Wright regarding the affairs of the said firms, and Mr John Roxburgh Strong, chartered accountant, Glasgow, was by his direction and on his behalf sent to London on 4th October 1878 to make an inquiry into the affairs of John Innes Wright & Company of London. Mr Strong examined the books of the company, and made full inquiries into its affairs, and prepared a state of affairs which was (before the agreement was entered into) submitted to and considered at a meeting at which Mr Bell, Mr Wright, and Mr Scott were present. In the said state of affairs the bills now sued for are entered under the ‘liabilities’ of the company thus—‘Acceptances to John Innes Wright & Company, Glasgow, £24,000.’ After being fully informed of the nature and purposes of the said acceptances, and of the assets and position of the said London firm, Mr Bell did not repudiate liability therefor, but, on the contrary, undertook by the said agreement to pay the same.] (Stat. 4) The said bills were drawn and accepted in the circumstances above set forth at the request of the City of Glasgow Bank, and of their manager Mr R. S. Stronach, who were fully aware of the facts hereinbefore set forth, and of the constitution of the partnership of John Innes Wright & Company of Glasgow and John Innes Wright & Company of London as set forth in the condescendence. The existence of the bills for £3000 and £5000, mentioned in the answer in explanation, was not known to Mr Bell. They are not entered in the books of either John Innes Wright & Company of London, or John Innes Wright & Company of Glasgow, and Mr Bell never gave anyone authority to bind his London firm by them. If paid by said firm, they were paid without his knowledge or authority. (Ans. 4) Admitted that the bank knew of the existence of the two companies, and that the late John Bell was a partner of the London company. Quoad ultra denied, and explained that at the time when the first two bills for £7000 each were endorsed, other two bills of the same parties for £3000 and £5000 respectively were granted and endorsed to the bank. The said last-mentioned bills were duly met at maturity on 26th April and 26th July 1878.”

The pursuers pleaded—“The defender being a partner of the acceptors' firm, is liable to the City of Glasgow Bank, the indorsees and holders of the bills libelled, for the amount thereof, with interest as concluded for. [(2) Separatim, The deceased John Bell, by the agreement of 8th October 1878, homologated or adopted the bills libelled, and is liable for the amount thereof.]”

The defender pleaded—“(2) The bills libelled not being debts of the firm of which the said John Bell was a partner, decree of absolvitor should be pronounced. (3) Separatim, The action cannot be maintained, because the City of Glasgow Bank became holders of the said bills in knowledge that they were accepted by the said John Innes Wright in name of his said firm, without value, and in excess of his powers as a partner. [(4) The deceased John Bell not having homologated or adopted the bills libelled, the defender is not liable for the amount thereof.]”

After a proof, the import of which appears from the opinions infra, the Lord Ordinary ( Curriehill) pronounced an interlocutor assoilzieing the defenders. His Lordship added the following note:—… “The difficulty of the case is one of fact rather than of law, the question to be decided being—Whether Mr Bell is to be regarded as having been liable for all the bills granted by his firm, or whether he falls under the recognised exception to the general rule of liability in respect of the bills having been handed by his partners to the bank, in security of their own private debt to the bank, without the knowledge and consent of Mr Bell? The circumstances of the case are peculiar. The firm of John Innes Wright & Company originally carried on business in London and in Glasgow, the sole partners being John Innes Wright and William Scott, and for many years they were largely indebted to the City of Glasgow Bank. In the spring of 1877 the London firm assumed as a partner the late Mr John Bell, merchant, Glasgow, and a new contract of copartnership was then entered into between Wright, Bell, and Scott, dated in March 1877, by which it was provided— [His Lordship here narrated the chief provisions of the contract, as above].

“It is important to observe that this contract of copartnership of the London and Rangoon firms was, soon after it was entered into, communicated to Mr R. Stronach, the manager of, and on behalf of, the City of Glasgow Bank, by Mr Innes Wright, who was not only a partner of all the firms, but was also one of the directors of

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the bank. That Stronach was, as manager of the bank, deeply interested in all the business relations of Wright and Scott, who were so largely-indebted to the bank, and that he was well acquainted with the terms of the contract, is, I think, clearly proved. He therefore knew precisely the position occupied by Bell as a partner of the London firm of John Innes Wright & Company, and as an entire stranger to the Glasgow firm of that name.

“It appears at first that Bell contributed no capital in cash, but within a day or two either before or after the stoppage of the bank he had paid into the firm a sum of capital of about £2500 or £2800. The property of Duniedaw, however, had not been paid for by Scott, and towards his share of the capital. Bell, soon after the formation of the company, supplied the funds to pay the price of that property by means of bills of his own firm of J. & M. P. Bell & Co. Neither Mr Innes Wright nor Mr Scott individually contributed any capital, although, as was stated by both of them in the witness-box, the balance on the trade transactions of the London and Glasgow firm was generally in favour of the latter firm to the extent of upwards of £20,000, which was regarded as equivalent to the contribution of capital by Mr Wright and Mr Scott as individuals. Assuming this to be so, it is obvious that if the Glasgow firm did not always leave a floating balance of at least that amount in the hands of the London firm, and if they should at any time call up that balance or a material part thereof, they would be guilty of violating the express provision of the contract prohibiting any partner from drawing out any part of his capital.

Mr Bell, it should be explained, was from the beginning truly a sleeping partner, and left the management entirely in the hands of the other two partners, in whom he appears to have had implicit confidence, and that this was his position must, I think, have been known by Mr Stronach, the manager of the bank. Although Bell appears to have called occasionally at the office of the Glasgow firm, and had some general conversation with any of the partners whom he might find there about the London and Rangoon business, he never saw the books, which were all kept in London, and everything was managed, as I have said, by his partners, the financial department being exclusively managed by Scott, while the general business seems to have been conducted by Wright and an assistant of the name of Galbraith in London.

In March 1878 it appears that there was a balance in the London books at the credit of the Glasgow firm of John Innes Wright & Company of a little over £20,000, and at the same time the Glasgow firm was largely indebted to the City of Glasgow Bank—one item of their indebtedness being the proceeds of certain bills drawn by Glen, Walker, & Company, and accepted by the bank, which had been handed to the Glasgow firm of John Innes Wright & Company to be discounted, on the footing that they were to retain a portion of the proceeds for their own business, and to hand the balance to the bank. On 28th February 1878 the Glasgow firm had failed to account for £48,000 of these proceeds, and the bank then insisted on obtaining substantial security for the deficiency. The Glasgow firm being unable to give the security required, it seems to have been arranged between Mr Scott, Mr Wright, and Mr Stronach that the Glasgow firm should draw upon the London firm to the extent of £32,000; that the London firm should accept these bills, and that the Glasgow firm should hand the acceptances to the bank as a security in the matter of Glen, Walker, & Company's bills. This was accordingly done. The bills were drawn in Glasgow by Scott in name of the Glasgow firm, and were accepted in Glasgow by Wright in name of the London firm, and were then handed to the bank, Mr Bell being kept in utter ignorance of the whole affair.

“Scott, indeed, alleges that these drafts were made in the ordinary course of business, and were covered by goods which the Glasgow firm had sent out to Rangoon, the proceeds of which were to be remitted by the Rangoon house to the London firm. I do not think that that statement is proved. On the contrary, Wright says that the bills were not granted against goods, but were granted in order that they might be handed to the bank as a security for the Glasgow firm's debt. But even if the bills had been covered in part by a balance at the credit of the Glasgow firm in the books of the London firm, it is certain that to a large extent the bills were not so covered. The balance in favour of the Glasgow firm did not exceed £20,000 even on Scott's own showing, while the drafts were for £32,000, and it must at the time have been obvious to anyone acqainted with the contract of copartnery, and the relations subsisting between the two firms, that if payments of these acceptances were to be demanded from the London firm, the whole of the alleged capital said to have been contributed by Scott and Wright would be drawn out of the London concern, which would thus be left without any working capital at all, and with no means of carrying on its business except a marginal credit of £5000 which the Rangoon firm had from the bank; and this view of the case is not in any way affected by the fact that certain of these bills, to the extent of £8000, were retired by Scott, as there still remained the four bills for £24,000 now sued for.

Another remarkable circumstance is that the bills were not ordinary trade bills, but were drawn at twelve and nine months. Moreover, they were not entered in the books of the London firm until after the stoppage of the City of Glasgow Bank, and the most serious feature in the case is that the fact of the bills having been granted was carefully concealed from Bell, who did not become aware of their existence till after the stoppage of the bank.

“Now, bearing in mind the admitted facts, viz.—that Stronach was well acquaiuted with the constitution of the London firm, and with the terms of its contract of copartnery; that Innes Wright was one of the partners of both the London and Glasgow firms, and was moreover one of his own directors; and that Stronach was in constant communication with Wright and Scott with reference to the affairs of the Glasgow concern, and was pressing them as the partners of that concern to give the bank some security for their defalcations in the matter of Glen, Walker, & Company's bills, and accepted as such security the bills of the London firm in the handwriting of Wright, of which firm Wright and Scott were only two out of three partners, the currency of

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the bills, moreover, being of such unusual duration as to take them out of the character of proper trade bills—it is, in my humble opinion, difficult to avoid the suspicion that this was a scheme concocted by these three persons for the purpose of obtaining the bills of the London firm as a security for the private debts of two of the partners. And, in any view, the presumption that such was the case is so strong as to throw upon the bank, who are now claiming payment of these bills from Bell or his representatives, the onus of proving that Mr Bell knew that the bills had been granted by the London firm, and consented to their being applied in securing the private debts of Wright and Scott, two of the partners of the firm, incurred by them in trading in Glasgow under another and totally distinct firm.

In the record, as originally prepared, the only question raised was, whether in point of fact the bank knew the relations which subsisted between the two firms, and that the bills had been accepted by John Innes Wright in name of the London firm without value and in excess of his powers as a partner; and in the proof which was originally allowed the defender was appointed to lead. But in the course of the cross-examination by the pursuers of Scott, the first witness examined, he stated that Bell, a few days after the stoppage of the bank, became aware of the existence of the bills, and homologated and adopted them by a written deed. The proof was accordingly stopped for further inquiry, and the result was a very material amendment of the record, in which the pursuers stated that on 8th October 188, in consequence of the insolvency of Mr Wright and Mr Scott, an agreement was entered into between them and Bell, whereby they withdrew from the business of John Innes Wright & Company of London, and W. Scott & Company of Rangoon, and made the same over to Bell, he undertaking to pay them out their interest, and ‘to pay the whole debts and liabilities and liquidate the obligations of the said two firms,’ and that before he did so he ‘was well aware that the bills now sued for formed part of the debts or liabilities of John Innes Wright & Company of London.’

“That, no doubt, is a formidable statement, and undoubtedly it appears that in the state of affairs in the London concern prepared by Mr Strong, accountant, Glasgow, with a view to the proposed dissolution, an entry occurs crediting the Glasgow firm with £24,000 (being the acceptances now sued for), but bringing out a balance of upwards of £10,000 in favour of the London firm. And if I thought that the proof clearly established that Bell then really understood the nature of the transaction and the history of these bills, I should be of opinion that the defenders would have considerable difficulty in escaping from the conclusions of this action. But I am satisfied upon the proof that Bell did not understand the position of matters, and that it would not be fair to hold him bound to the bank by this undertaking in the contract of dissolution, which was never communicated to the bank, and which remained unknown to them until Scott alluded to it in the witness-box in the course of the proof in this action. It was at best an arrangement inter socios to which the bank was not a party, and I think it means nothing more than this, that Bell was merely to undertake such debts and liabilities as could fairly come under the denomination of partnership liabilities. He accordingly at once set about investigating the matter thoroughly, and on 21st October, within a few days after the dissolution took place, he became aware that the bills were not truly partnership liabilities at all, but had been got up in the way already explained behind his back, and he at once intimated to the bank that he repudiated all responsibility for the bills and declined to pay them. As I think nothing was done by him between the failure of the bank and 21st October 1878 amounting to homologation or adoption of these bills as in a question with the bank, my opinion is that these bills, though nominally the acceptances of the London firm, were truly granted by one partner of that firm as a security for the debt of himself and another partner; that this was known to the bank, and that the bank have failed to discharge the onus incumbent on them to show that this was done with the consent of the firm and of the remaining partner. (See Bell's Prin., secs. 354–355.) The defender must therefore be assoilzied with expenses.”

The pursuers reclaimed, and argued—There was an implied mandate in one partner of a mercantile firm to sign money documents relating to the firm's business. But when the creditor of one partner took a firm obligation in discharge of his private debt, then the creditor must show that he has the consent of the other partners. Now how did the facts stand here? In the first place, as between the Glasgow firm and Mr Bell—The London firm were debtors of the Glasgow firm to the extent of £22,000. [ Lord President—But that was just Wright and Scott's contribution to the capital of the London firm. Wright's evidence is quite candid that it was only capital.] It was not at anyrate put in as capital eo nomine. [ Lord Shand—But even assuming that, £32,000 is a plain overdraft against £22,000.] The bills here in question were only for £24,000. [ Lord Shand—That is still an overdraft.] Not to such an extent as to vitiate the bills. At least, if the Glasgow firm were entitled to credit themselves with the £22,000, the bills were good for that amount. But (2) as in a question with the bank—If they either knew, or were put on their inquiry, as to the badness of the bills inter socios, assuming the bills to be so, the bank could not maintain an action on the bills. But it was not said that they actually knew, and there was nothing to put them on their inquiry. There was nothing to show that they knew the state of affairs between the two firms, or to redargue the presumption that the bills were ordinary trade bills. Then (3) as to homologation, assuming the bills to be bad as in a question with the bank—Bell had adopted or homologated the bills by undertaking all the liabilities and obligations of the London firm.

Argued for the respondent—The bills were accepted ultra vires, and consequently Bell was not bound. To draw against the £22,000 was virtually to take out the capital which Wright and Scott had put in, and that was contrary to the terms of the contract of copartnery. Beyond the £22,000, there was nothing to the credit of the Glasgow with the London firm. Besides, the bills were not passed through the books of the London firm, and so Bell had not the usual means of knowing of their existence. Further (2) the

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bank was put on its inquiry as to the character of the bills. They were not ordinary trade bills, and the bank did not treat them as such; they treated them as security bills. They were for nine and twelve months. Further, the manager of the bank had read the contract of the London firm, and knew consequently Bell's position in it. He ought therefore to have asked Bell whether he sanctioned the acceptances or not. (3) As regards the homologation. All that Bell did was merely to undertake the liabilities of the firm, whatever these were, and that left the question just where it was. There was nothing to show that the peculiar character of the present bills had been brought under his notice. [The Court did not hear the respondents' counsel in reply to the Lord Advocate for the reclaimers on the question of homologation.]

Authorities— Bo'ness Canal Company v. M'Alpine, Fleming, & Company, Nov. 23, 1791, Hume 751; Miller v. Douglas, Jan. 23, 1811, F. C., 3 Ross' L. C. (Com. Law) 580; Clark v. Shepherd, Nov. 30, 1821, 1 S. 170, and Feb. 28, 1823, 2 S. 224; Blair v. Bryson, June 11, 1835, 13 S. 901; Mackenzie v. British Linen Bank, February 11, 1881, 18 Scot. Law Rep. 333; Swan v. Steele, Feb. 7 1806, 7 East. 210, 3 Ross' L.C. (Com. Law) 459; Hope v. Cust, 1774, 1 East. 48; Sandilands v. Marsh, 1819, 2 Barnwell and Alderson, 672, 3 Ross 463; Ridley v. Taylor, Nov. 28, 1810, 13 East. 175; Levieson v. Lane, Nov. 7, 1862, 32 L.J. C.P. 10; Kendal v. Wood, May 18, 1870, Law Rep. 6 Exch, 243; Bell's Prin. 355; Bell's Comm., 5th ed., ii. 616, M'Laren's ed., 504; Lindley on Partnership, i. 325, 329.

The Court took the case ad avizandum.

At advising—