Scottish Court of Session Decisions

The Partnership Act 1890 enacts, section 2, sub-sec. 3 ( d)—“The advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business, or liable as such: Provided that the contract is in writing, and signed by or on behalf of all the parties thereto.”

This was an action brought in the Sheriff Debts Recovery Court at Glasgow by Robert R. Stewart, grocer and wine merchant, 184 High Street, Edinburgh, against the City Stockroom Company, 16 to 20 Springfield Court, Glasgow, and Robert William Saunders of that address, and Charles Buchanan, 65 Montgomerie Street, Kelvinside, Glasgow, the alleged partners of the company, for payment of an account for goods supplied to the company.

Buchanan alone appeared to defend. His defence was that he was not a partner of the company.

Charles Buchanan was the proprietor of subjects at 16 to 20 Springfield Court, Glasgow, of which he granted a lease in favour of Robert William Saunders, therein described as “about to carry on business in the said subjects under the name or firm of the City Stockrooms Company.”

Under the lease Buchanan agreed to fit up the premises to suit the requirements of Saunders' business as might be arranged between parties, “and failing agreement as the first party (Buchanan) may determine,” to the extent of a sum not exceeding £1200; and he further agreed in the same terms to furnish the premises to the extent of a sum not exceeding £700. The lease provided as follows—“At the expiry or earlier termination of the lease the whole fittings, fixtures, furniture, and others shall be and remain the property of the first party in the absence of payment of loan.”

The lease was for the period of fifteen and a-half years at a weekly rent, “but only from week to week,” and terminable by Buchanan, in the event of breach of any of the conditions by Saunders, on one month's notice.

Along with the lease an agreement was entered into between Buchanan of the first part and Saunders of the second part, under which in addition to the two sums mentioned above Buchanan agreed “to advance the further sum of £100 as the same may in his opinion be required, and as he may think proper from time to time, in starting and developing and carrying on the business of the second party in said premises, making in all the sum of £2000, which shall be placed to the credit of the first party on loan capital account in connection with the said business, and on which the first party shall receive interest at the rate of 7 1 2 per cent. per annum, payable monthly, any additional sums required for necessary outlays in connection with the said business shall only be advanced by the first party in his discretion and option, and shall be repaid to him, with interest at 7 1 2 per cent. per annum, out of the first sums to be realised from the business as soon as they come in.”

Under the agreement Saunders was entitled to engage assistants with the consent of Buchanan, and he was entitled to charge the business with a salary which might be raised from time to time with the consent of Buchanan as the business progressed. Saunders was taken bound to keep proper books and to devote his whole time to the business. The agreement prescribed the mode in which all sums drawn from the premises let in carrying on the business should be applied, and gave Buchanan the right to appoint a cashier in the event of rent and charges not being paid or the business being carried on at a loss, or the profits being in his opinion disappointing, and to appoint an auditor. It provided for policies of fire insurance to be effected in name of Buchanan primo loco, and Saunders in reversion, and after all disbursements from revenue it provided, “the surplus shall be divided equally between the second party in name of profit, and the first party in name of extra interest, and all moneys received from said business shall be held and applied in trust only for the purposes above specified.”

The agreement further provided—“ Sixth. The second party shall not be entitled to incur any obligations beyond the necessary requirements of the business, or grant any bills or enter in to any risks or speculations in connection with the said business, nor

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shall the first party be or be held to be a partner in the said business, or liable for its debts or obligations, nor shall he be liable for any debts or losses, or in any way in connection with the affairs of the second party.… Eighth. In the event of the said business proving successful after two or three years' trial, it shall be turned by the said parties into a limited liability company, … and the first party shall receive 7 1 2 per cent. preference stock for his capital outlays in connection with the said premises, and the ordinary stock shall be divided equally between the said first party and the second party and their respective nominees.”

Evidence was led. Buchanan deponed that he supplied the whole capital for the business.

On 3rd March 1903 the Sheriff-Substitute ( Davidson) pronounced an interlocutor whereby he found that the defender Buchanan was not a partner of the City Stockrooms Company when the goods, the price of which was sued for, were ordered, and assoilzied him from the conclusion of the summons, and granted decree in absence against the other defenders.

Note.—“The position of the defender Buchanan is precisely that defined in section 2, sub-section (3) ( d), of the Partnership Act 1890. There is evidence, both oral and written, that he was not a partner; and no proof has been adduced that he held himself out to third parties.”

The pursuer appealed to the Sheriff,

On June 10, 1903 the Sheriff ( W. Guthrie) pronounced the following interlocutor:—“Having heard parties' procurators, and considered the cause (there having been no appearance in the cause by or for the other defenders)—Recals the judgment appealed against: Finds that the defender Buchanan is carrying on business with the said Robert W. Saunders under the name and firm of the City Stockrooms Company, and that he is a partner of that firm and company along with the said Robert W. Saunders: Finds that the goods, the price of which is sued for, were sold and delivered by the pursuer to the said company: Therefore decerns as craved.”

Note.—“The evidence in this case consists entirely of the lease and the missive agreement in process. I am unable to regard it as showing a simple case of loan under the Partnership Act 1890, sec. 2 (3) ( d). The written agreement is intended to simulate a loan transaction, with a very strict security over moveables and a going business in security of the loan. But I think one cannot read the agreement without seeing that it goes further than any previous case, and gives the lender the powers not of a creditor but of the dominant partner of the company. To begin with, the other partner, though he is to get half profits, if there are profits over and above his salary, is merely the hand and instrument of the defender. In other cases, such as Mollwo, March, & Company v. The Court of Wards, L.R. 4 P.C. 419; Ex p. Tennant, 6 Ch D 303; and Badeley v. Consolidated Bank, 38 Ch D 238, the powers of a lender to interfere in the business for the security of his loan were of an extremely extensive kind; and I think that these cases carried the principle of allowing lenders to escape the responsibility of partnerships which are mortgaged to them and worked chiefly for their benefit, as far as it is possible in reason to carry it. I think that this case goes further than any of them, for it presents us with a company started in a building belonging to the defender—I believe started at his suggestion and for his benefit—with a man of no means installed under a written agreement as his manager, apparently independent, and alone empowered to sign the name and conduct the business, but bound hand and foot to the defender, who fits up and furnishes the premises with money ex facie lent, advances all the money required to start the business, has a voice in the appointment of all servants, has an auditor, and has power to appoint a cashier with co-ordinate powers with the manager, besides various other conditions as to the determination of the business and the distribution of the assets. I can come to no other conclusion on the construction of this minute of agreement than that this defender was the real owner of the business, and that he admitted Saunders to participate only as one pays a servant by giving him a share of profits. If I had any doubt about this I would allow further proof, as may be done under the Act. In construing the clause of the Partnership Act it is well to remember the often quoted words of Sir Montague Smith in giving the judgment of the Privy Council in Mollwo, March, & Company—‘The judgment in Cox v. Hickman had certainly the effect of dissolving the rule of law which had been supposed to exist, and laid down principles of decision by which the determination of cases of this kind is made to depend, not on arbitrary presumptions of law but on the real contracts and relations of the parties. It appears to be now established that although a right to participate in the profits of trade is a strong test of partnership, and that there may be cases where, from such participation alone, it may, as a presumption not of law but of fact, be inferred, yet that whether that relation does or does not exist must depend on the real intention and contract of the parties… . Again, wherever the agreement between parties creates a relation which is in substance a partnership, no mere words or declaration to the contrary will prevent, as regards third persons, the consequences flowing from the real contract.’”

The defender Buchanan appealed, and argued—The case was one of money lent in such terms as to give the lender a control to prevent its being wasted, but in no such terms as to deprive him of the protection of sec. 2, sub-sec. 3 ( d), of the Partnership Act 1890. There was no evidence of the intention of parties except in their contract, which expressly declared that they were not partners. The case was governed by the authorities cited by the Sheriff—

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Mollwo, March, & Company v. The Court of Wards (1872), L.R. 4 P.C. 419; Badeley v. Consolidated Bank (1888), L.R., 38 Ch D 238. The case of M'Cosh v. Brown & Company's Trustee, May 5, 1899, 1 F. (H.L.) 86, 36 S.L.R. 619, differed from the present; there the money was not lent to be repaid as the £100 advanced in terms of the agreement was here.

Argued for the respondent—In order to take advantage of the provisions of the Partnership Act relied on the appellant was bound to show that he was merely a lender of money; this he had failed to do; the business was his, and Saunders was in the position of his salaried manager rather than that of his partner. Half the corpus of the business was to go to Buchanan in the event of its proving successful; these considerations were conclusive— M'Cosh v. Brown & Company's Trustee, cit. sup.

At advising—