Scottish Court of Session Decisions

This action was raised in the Sheriff Court of Berwickshire by David Alexander Stott, leather merchant, Canonmills, Edinburgh, against Robert Fender, farmer, Northfield, Coldingham, and James Crombie, joiner in Dunse. The pursuer in his summons concluded for payment of £498, 12s. 1d., with interest, as due under certain bills accepted by Turnbull & Co. The circumstances of the case were as follows:—A business as tanner and skinner had been carried on in Dunse by John Turnbull up to February 24th 1871, who at that date was sequestrated, and James Crombie, one of the defenders, was elected his trustee. On 2d November 1868 Turnbull had opened a cash-credit account with the British Linen Co.'s Bank at Dunse for £400, the two defenders being his cautioners. The bank accordingly claimed as a creditor on his sequestrated estate, and on 31st August 1871 got payment from the estate of £11, 11s. 6d., and from the defenders the balance due, with interest, in all amounting to £383, 2s. 6d. Turnbull had on 9th March 1871 offered 4s. in the pound, tendering Crombie as his cautioner. His creditors had accepted this, and he was discharged on 19th April 1871.

After the discharge the business was carried on under the style of John Turnbull & Co., and in June 1871 the defenders, along with the firm of Aitchison & Rae, slaters, Dunse, and John Aitchison and James Rae, the partners of that firm, became security to the extent of £500 sterling on a credit or cash-account opened in the books of the Royal Bank of Scotland's Branch at Dunse in name of the defender James Crombie. The balance due on the cash-account with the British Linen Company's Bank was paid out of this credit, and moneys were lent therefrom to Turnbull to enable him to carry on his business. Subsequently to the resumption of business the pursuer supplied goods to John Turnbull & Co., in payment of which promissory-notes and bills granted and accepted by that company were given. He now sued the defenders for payment of these.

The pursuer alleged that the credit of the firm was obtained in many cases on the faith of the defenders being partners. He further averred (Cond. VII.) that soon after Turnbull's sequestration an arrangement was made between him and the defenders for carrying on the business under the firm of John Turnbull & Company, for their joint benefit, and among other things it was arranged that all moneys received by the firm should be paid into the second-mentioned cash-account, and all disbursements necessary for the carrying on of the said business should be made by cheque on the account, the cheques being signed by Crombie, who alone had this power.

The defenders in their separate defences stated that the pursuer and they were personally unknown to each other, and never had any business transactions. They admitted that for their own protection, and for that of Aitchison & Rae, it was arranged that Turnbull's books should be periodically examined by Crombie, and that the moneys received by Turnbull should be paid by him into the credit-account with the Royal Bank, cheques signed by Crombie being granted him for money required out of that account, Turnbull transacting the business wholly himself.

The pursuer pleaded—“The pursuer being a just and lawful creditor of the company of John Turnbull & Company to the amount libelled, and the defenders being partners of the said company, they ought to be decerned to make payment to the pursuer of the sum sued for.”

The Sheriff-Substitute ( Dickson) after proof pronounced an interlocutor finding for the pursuer in terms of the conclusions of the summons. In a note thereto appended the ground of the decision is summed up in the following sentence—“This is a case of latent partnership, and the question hardly arises … . of credit being given in consequence of the parties holding themselves out as partners. There was a substantial but a concealed partnership.

The defenders both appealed to the Sheriff ( Pattison), who recalled the Sheriff-Substitute's interlocutor and pronounced these findings of facts—“(1) That previous to 24th February 1871 John Turnbull carried on business as a skinner and tanner in Dunse in his own name; (2) That having been sequestrated on 24th February 1871, under the Bankruptcy (Scotland) Act 1856, he on the 19th day of April 1871 obtained his discharge, following upon an offer of composition of 4s. in the pound, made by him and accepted by his creditors under that sequestration; (3) That the said composition, with the expenses of the sequestration, for which he undertook to provide, exhausted the available funds and effects falling under the said sequestration; (4) That from on or about the said 19th day of April 1871 until on or about the 4th day of March 1876 a company of John Turnbull & Company carried on business as skinners and tanners in Dunse; (5) That the moneys required for carrying on the said business of John Turnbull & Company were supplied by the defenders Robert Fender and James Crombie, chiefly through cheques drawn by the defender Crombie upon a cash-credit account for £500 with the Royal Bank of Scotland at Dunse, obtained by the defenders, upon which the defender Crombie was alone authorised to draw, and to which cash-credit the said John Turnbull was not a party or an obligant in the relative bond to the bank; and partly and occasionally also through cheques drawn by the said defender on his private account with the branch of the City of Glasgow Bank at Dunse; and the debts contracted in carrying on the said business were so paid by the defenders by cheques drawn, payable sometimes to the said John Turnbull or bearer, and sometimes to the creditors direct; (6) That the moneys drawn and received from customers and purchasers of their goods, and otherwise in the course of the business of John Turnbull & Company, were generally and with trifling exceptions paid to the credit of the said cash-credit account of the defenders; (7) That there were paid by the defenders to the said John Turnbull, from the said 19th day of April,

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25s. sterling weekly in name of wages for his services in the said business—at the same time as and along with wages to others employed in the business; (8) That the books, and particularly the cash-book of the said John Turnbull & Company, were kept until November 1873 by George Ewart, accountant in Dunse, upon the employment of the defenders, subject to their inspection, and in said cash-book the sums drawn by means of the cheques above mentioned were entered, not as received from the defenders but as drawn from the bank; (9) That a balance-sheet, as at March 1873, was made out by the said George Ewart for the satisfaction of the defenders, which showed a profit of £144, 0s. 7d. as having been realised, but was not then in the shape of divisible cash; (10) That in said balance-sheet the sum of £500 obtained under the said cash-credit from the Royal Bank was entered as an asset or item of the capital of the company of John Turnbull & Company; (11) That in the sequestration of John Turnbull, in February 1871 above mentioned, a claim had been made by the British Linen Company Bank for a sum due upon a cash-credit account for £400 with the said bank, in name of the said John Turnbull, for which cash-credit the defenders were co-obligants, but in so far as regards John Turnbull's cautioners there remained due to the British Linen Company Bank, after crediting the said composition of 4s. in the pound paid to the bank, a balance amounting to £383, 2s. 6d., for which sum the defenders were liable to the bank, and for which it is admitted that neither John Turnbull nor his estate was legally liable to the defenders; (12) That among the sums paid by John Turnbull & Company, through the defender Crombie's cheques upon the cash-credit with the Royal Bank of Scotland above mentioned, was the above debt of £383, 2s. 6d., the payment of which is entered in the books of the said company and to the debit of the said cash-credit account of various dates in the years 1871, 1872, and 1873; (13) That there was no agreement in writing under which the said business was carried on as above set forth, or as to the division of the profits thereof; neither is there any trustworthy or sufficient evidence otherwise of any binding agreement between the parties other than what the above facts infer: Finds that in these circumstances the defenders are partners of the company of John Turnbull & Company, and are in law liable for the debts of the said company;” and he decerned against them accordingly.

“ Note.—This case, like most cases of disputed partnership, is involved in some obscurity, and is attended with difficulty. That difficulty is enhanced in the present case by the absence of any definite written agreement entered into at the time regulating the obligations and rights of the persons concerned.

The Sheriff has not proceeded upon the parole evidence adduced, the competency of which he much doubts, and the relevancy of which is not apparent. No doubt a partnership may competently be proved by parole evidence; but this is only corollary to or part of the doctrine that it can be established rebus et factis. The kind of parole evidence that is relevant and competent to prove a partnership therefore is the evidence of such res et facta as are of themselves indicia of the existence of a partnership. It by no means follows that parole evidence is admissible to prove, not the facts, but the mere terms or import of verbal arrangements between parties, or of their several understandings. In the present case the three witnesses—the defenders Crombie and Fender and John Turnbull—do not agree in their statements, which, besides, leave the terms of the arrangement, if any, indefinite in most important respects, and leave it doubtful if there was any distinct arrangement in which they all concurred, and it does not clearly appear that any distinct understanding even existed upon the subject. In any view, the evidence is liable to the observation that it is given ex post facto, and when the recollection and consequent representation of what had been agreed on before is very apt to be coloured by the immediate pressure of consequences, especially when no written agreement was entered into.

The facts contained in the findings in the above interlocutor rest upon the books and writings produced, corroborated by the parole evidence as far as it goes.

It is said that the object of the defenders in providing means to enable the business of Turnbull & Company to be carried on was, in the first instance at least, to recoup themselves what they had lost through their cautionary obligation for Mr Turnbull to the British Linen Company out of the profits or proceeds of the business which was to be carried on by him with their moneys. This may have been their motive or object, but there is nothing either in writing or in the parole evidence limiting their interests in the business to that.

Turnbull, it will be observed, contributed nothing for the carrying on of that business except his personal services, and (which may have been of some value) the goodwill of his name and of the business which he had personally carried on though unsuccessfully. For his services he was paid weekly wages. For the moneys advanced by the defenders he did not come under any obligation of repayment to them. He did not grant any document making him debtor therefor to the defenders. The sums were drawn for debts represented by him to be due in the carrying on of the business, or for disbursements, such as wages to himself and others, necessary for that purpose. There was not any obligation on the defenders to make these payments. And they kept the control in their own hands by reserving to the defender Crombie alone the power of drawing upon the cash-credit for £500, that these moneys could be used by him only in the regular course of trade, and the supply could be at any time stopped at the will of the defenders. Turnbull was not himself liable to the bank for the moneys so drawn, or under any obligation to the defenders other than that of applying them to the purpose of the business. He was in effect their agent in employing the sums so drawn and handed to him. It does not appear, from anything either in the written or parole evidence, that he was to get any definite share of the profits of the business other than his weekly payment. Nor does it appear what was to be the division of profits at any time. It is clear, upon the ordinary principles of copartnership, that as the defenders advanced the capital embarked in the business they would, as in a question with Mr Turnbull, if he was their partner,

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be entitled to repayment of that capital before any division among the partners of the surplus, if such had existed, after satisfying the whole debts and obligations of the business. The defenders therefore seem to have been principals in the business rather than copartners of Turnbull, and he was rather their agent for carrying on that business than in the independent position of a partner. The business while subsisting, having been carried on with the capital of the defenders, they were entitled to the profits, if any, realised therefrom. There was no agreement or contract to the contrary, nor anything by which they could have been prevented from carrying on the business as long as they might consider it beneficial, and with another manager than Turnbull, or from appropriating the whole profits, while they could put a stop to it at any time by simply withdrawing their obligation to the bank. As there was no actual division of profits, there is nothing to show directly that the defenders de facto received or participated in them. But the case is made out independent of such participation.

In these circumstances, the Sheriff cannot doubt that the defenders are liable for the debts contracted in the carrying on of the business.

It is argued by the defenders that the principle that participation in profits as a general rule implies partnership is no longer recognised, and is altogether exploded. No doubt it is provided by the Act 28 and 29 Vict. cap. 86 (5th July 1865)—“The advance of money by way of loan to a person engaged or about to engage in any trade or undertaking, upon a contract in writing with such 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 such trade or undertaking, shall not of itself constitute the lender a partner with the person or the persons carrying on such trade or undertaking, or render him responsible as such.”

But this enactment is very limited in its application. In the first place, there must be advance of money by way of loan; and secondly, the condition as to payment of interest according to the profits, or by giving a definite share of profits, must be expressed by contract in writing.

This statute has, therefore, no application in this case, because there was no contract in writing upon the subject between John Turnbull and the defenders that they were to be entitled either to a share of profits or to a rate of interest varying with the profits.

In the second place, there is no proof of any advance by them to John Turnbull by way of loan. The defender Crombie draws cheques upon a cash-credit account with the Royal Bank of Scotland for £500, for which he and the other defender Fender were the sole obligants, and to which Turnbull was no party, or upon his own private cash-account with the City of Glasgow Bank. These cheques are drawn for sums represented as due in the regular course of the business of John Turnbull & Company; and Turnbull applies the amounts so drawn in the business of John Turnbull & Company accordingly. There is not alleged or proved any valid obligation on them to advance money to John Turnbull. The sums they were entitled to see applied to the purposes of the business. They thus kept control over the employment of the capital, and were not at all in the ordinary position of lenders. Besides, there is no document under Turnbull's hand acknowledging these as advances to him by way of loan, and the cheques do not prove that. The presumption is that the cheques were drawn by the defenders for their own benefit, and that Turnbull is merely their hand to draw the money. They not being his debtors to any extent, Turnbull's indorsement on the cheque is no proof of a loan. “That is well settled in law. The books of Turnbull & Company, if competent evidence, do not prove it, for in them the sums are entered simply’ as drawn from the bank. The only thing that bears a semblance of proof of a loan in this case is the parole evidence, unsatisfactory as it is. The Sheriff need hardly say that such evidence is quite incompetent by the law of Scotland to prove an advance of money by way of loan. It appears to the Sheriff that the facts in the present case exactly correspond with the legal presumption that Mr Crombie's cheques upon the cash-credit with the Royal Bank were drawn for the defender's own purpose, viz., the carrying on of the business of Turnbull & Company for their behoof. In short, it was their own business. It was not an advance by way of loan to Turnbull as a person carrying on an independent business.

It is not therefore necessary to consider whether the principle that participation in profits as a general rule implies partnership is exploded. But the Sheriff may say that, in his opinion, the authorities do not support any such proposition in the abstract. That participation in profits is not per se a conclusive test of partnership is well established. The case of Cox v. Hickman, which was decided before the Act of Parliament above referred to went upon that ground. And there are various decisions in the English Courts to that effect. But the participation in profits has always been, and still is, a very important element in the question of partnership or no partnership. The true doctrine may be stated to be this—that such participation does in the general case imply partnership, and that to do away with its effect it must be shown that the participation is attributable to some contract other than that of copartnery, and easily distinguishable from it. Upon this subject the Sheriff takes leave to refer to the judgment of the Master of the Rolls in the case of Pooley v. Driver, 28 and 29 November 1876, 5 L.R. (Ch. Div.) 459, where the cases of Cox v. Hickman, of Mollno, March, & Company v. Court of Wards, and many other cases therein referred to, are fully considered and commented on, and which opinion, if the Sheriff may be allowed to say so, correctly expresses what he holds to be the law on the point.

As to the case of Eaglesham & Co. v. Grant, there was a distinct written agreement embodying the agreement of the defender Grant and the trader Munro, which showed clearly that nothing of the nature of a partnership existed between them, and that the defender Grant's connection with the business was truly of the nature of a security of the obligation which he undertook to guarantee payment of the last two instalments of Munro's composition; and the only return which he stipulated for besides was a commission at the rate of 7½ per cent, on all moneys received or recovered by him in connection with the carrying on of the business, it being expressly agreed that

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the whole surplus after paying expenses and the commission were to belong to Munro, and therefore that case came quite within the principle of these English decisions. There is no agreement of that kind in the present case, and nothing to do away with the conclusion deducible from the facts as above set forth.

The Sheriff has therefore given judgment for the pursuer, with expenses.”

Both defenders appealed to the Court of Session.

Argued for them—Partnership was a consenual contract, apart from holding oneself out to be a partner, by which one might incur liabilities. The elements were a share of the profits and a share of the losses. It was erroneous to suppose that the right to a share of the profits was a test of partnership; that was not so. All that such a right amounted to was that it formed part of the evidence on which the existence of a contract of partnership might be based. Now in this case did the parties mean to become partners? It was clear they did not. Even on the question of profits there was here no evidence that they shared them. Fender and Crombie could only be held liable if under the guise of a loan they really had an interest in the concern. In point of law they must have held themselves out as partners to the person who was thus induced to deal with the firm, but that was not so.

Argued for the pursuer—Turnbull was the agent of Crombie and Fender, and was thus able to bind them. It was not essential to make out the exact nature of the partnership. After the first settlement no debt remained, and accordingly the cash-credit overdraft was not a debt due by Turnbull to Crombie and Fender, and they could not therefore stipulate for the first profits of the business being paid in to the bank in extinction of the debt without becoming partners in the concern by doing so. Here there was no debt at all; they could not, save by force of the arrangement entered into, interfere with Turnbull in any way. The best test was participation in the profit. This case was distinguishable from Cox v. Hickman, as the defenders wished preferentially to benefit themselves. The bargain came practically to this—“Prior to sequestration you had a good business.” “If we do not advance money you cannot carry on, but we will do so, and get back (1) our money, (2) our former debt.” That was partnership. An advance to an individual was one thing, to a business it was another. As to the matter of time, every partnership was limited by a date, and in the same way that date might be fixed as here by reference to an event. If an example were required, that of building societies might be taken.

Authorities— Eaglesham v. Grant, July 15, 1875, 2 R. 960; Pooley v. Driver, 5 L.R. (Ch. Div.) 458; Ex parte Tennant, 6 L.R. (Ch. Div.) 303; Ex parte Delhasse, 7 L.R. (Ch. Div.) 511; Cox v. Hickman, 8 Clark's H. of L. Cases. 268; Bullen v. Sharpe, 1 L.R. (C.P.) 86; Lindley, vol. i. 43.

At advising—