Scottish Court of Session Decisions

The Mercantile Building Investment Society,

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having its chief registered office at 119 St Vincent Street, Glasgow, was originally registered under the Statute 6 and 7 Will. IV. cap. 32. At the date of the present action it was registered under the Building Societies Act 1874, under which statute it received a certificate of incorporation.

William Sinclair, steamship agent in Greenock, was in May 1874 admitted a member of the society. In 1878 the rules were amended, and rule 12 thereafter stood thus—“Any member may transfer his shares, on which no advance has been granted, on payment of a fee of one shilling per share; or such member may withdraw his instalments, with interest thereon, at the rate of 4 per centum per annum, on giving one month's written notice to the manager, and the same shall be paid as soon as the funds permit, on delivery of the member's pass-book and a proper receipt, whereupon he shall cease to be a member in respect of such shares.” Sinclair never obtained any advance, nor was he a debtor to the society.

On 25th January 1882 the rules were altered by a special meeting of the society. Sinclair did not attend this meeting. No. 15 of the rules of 1882 was in these terms—“Members may withdraw their shares on which no advances have been granted, with one-half of the profits allocated thereon, till the 31st day of January preceding repayment, and interest on said instalments for the period between the last-named date and said repayment, at a rate per annum equal to one-half of the profits allocated for the previous financial year, on giving one month's written notice to the manager Such repayments to withdrawing members holding shares subscribed for prior to 31st January 1881 shall be under deduction of 15 per cent. of the instalments due on, and the profits allocated to, said shares as at last-named date.”

Upon 8th March 1882 Sinclair gave notice to the manager of the society of the withdrawal of the instalments paid by him on his shares, and during the year 1882 and 1883 he frequently called at the society's office to get payment of the sums he claimed. He was offered to be paid out under the rules of 1882, but that involved a deduction to which he objected.

Sinclair eventually raised the present action against the Mercantile Building Investment Society, concluding for payment of £365, being £313, 19s. 2d. as the total amount of instalments on his shares, and £51, 2s. 7d. as interest at 4 per cent. from the respective payments of instalments up to 8th April 1882. The pursuer averred that at the date of his notice of withdrawal, rule 12 of the regulations of 1878 was the basis of his contract with the defenders, and that he was entitled to be paid out one month after the date of the notice, or as soon thereafter as the society was in funds to pay him. He also alleged that he was no party to the altered regulations, and was not present at the meeting on 25th January 1882 at which they were passed, and that he objected whenever the defender sought to apply the said altered rules to him. He maintained that these alterations were ultra vires of the society. He specially objected to the deduction of 15 per cent. proposed under rule 15.

The defenders averred that the regulations objected to by the pursuer were in force at the date when he lodged his notice of withdrawal on 8th March 1882, and that they were the rules under which the society was at the date of this action being carried on. The 17th rule provided that the “books shall be balanced, and the profits or losses declared, at the end of January in each year.” Provision was made by the said rule for allocation of the profits of any year in which profits had been made, after setting apart a reserve fund. The same rule further provided that “at the close of the years during which there have been losses declared, these shall be allocated amongst the shares, each member's loss being debited to his account, and at the end of his pass-book, in proportion” to the instalments due on his shares. The 15th and 17th rules applied to all members of the society, whether advanced or unadvanced, and the losses sustained by the society prior to the pursuer's notice of withdrawal, if allocated among the unadvanced members alone (which would be the result if these rules were held to be ultra vires), would leave the pursuer with a smaller sum to receive than was now tendered to him. They also alleged that the society had suffered losses, and that a certain portion of the loss was allocated to the pursuer, and that the sum which they were due him, and were all along ready to pay him, was £210, 6s. 6d. They further averred that under rule 33 of the existing rules it was provided that all disputes between the society and any of its members should be referred to the Registrar of Friendly Societies in Scotland, and that they were ready and willing to refer the present dispute to him.

The pursuer pleaded, inter alia—“(4) Rules XV. and XVII. of the copy rules so far as these are calculated to impose upon the pursuer, as a withdrawing member, a different mode of settlement from that provided under rule XII. of 1878, or involving deductions or charges against him not embraced in the latter rule, were illegal and ultra vires of the meeting at which the same are alleged to have been adopted; at least, those alterations having been made without his consent, and not having been acquiesced in by him, are not binding on pursuer. (7) The defenders having for more than forty days failed to comply with the pursuer's application to have the disputes between him and the defenders determined by the registrar, under the provisions of said rule XXXIII., have forfeited any right to have the said disputes so determined, and in terms of section 35 of the Building Societies Acts of 1874 the same now fall to be determined by this Court.”

The defender pleaded, inter alia—”(2A) The pursuer having acquiesced in the said existing rules of the society, and the society having been carried on thereunder, from the date when the same were passed till this action was raised, without any objection from the pursuer, he is not now entitled to object to their validity.”

The Sheriff-Substitute ( Lees) found for the pursuer, and granted decree for £350, 8s. 3d.

In his note, after narrating the facts as above detailed, the following passages occur—“Various pleas for the defenders have already been disposed of, and the question that now has to be disposed of is, Is the pursuer barred by the resolution of 25th January 1882, or the rules subsequently adopted, or in any other way, from insisting in

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the present claim? I do not think he is barred by acquiescence; for though he does not appear to have dissented from the resolution, he lost no time in withdrawing from the society, and while he has not sued the society at once, it is to be noticed that he made frequent applications for payment, and that there was little use in suing them till they were in a position to pay what he claims. … It appears to me that the pursuer is entitled to the protection of the Court against so sweeping a forfeiture, and that he must get the decree which I have granted him.”

By interlocutor of 31st December 1884 the Sheriff ( Clark) recalled this interlocutor, and found that the matters in dispute fell to be determined by arbitration, as relating to the internal management of the association, and that the pursuer was barred by acquiescence and personal exception from calling in question the validity of the change in the regulations.

“ Note.—The plain meaning of the Legislature is, that all questions arising within a society of this kind, that is, inter socios, should be determined, not by the courts of law, but by the methods of arbitration provided by the statutes. To hold otherwise would, I think, be to ignore the obvious policy of the Legislature, and also the very statutory words. There are some elements, no doubt, which may be held as not properly falling within the sphere of the arbitrators—one of those would be whether, as in the present case, the validity of the rules of the society, according to which the arbitrators would have to proceed, was itself legitimately called in question. There have been some English decisions which might be read as holding that even a question of this kind falls within the sphere of the statutory arbitration, but the opinions of the Scotch Supreme Courts would seem to be adverse to this view, and it does not appear necessarily to follow from what has been decided in England. I am inclined, therefore, to hold that if a relevant case was made out for calling in question the validity of the rules, this would properly fall to be determined by an action of reduction, and that, as already held in the interlocutor of 4th April 1884, there is nothing to prevent such reductive pleas from being dealt with in the Sheriff Court under the Act of 1876. But the question here is, whether any such difficulty really presents itself, that is to say, whether the pursuer has stated any good grounds on which he could maintain reduction, or whether, in other words, he is not barred personali exceptione from maintaining any such plea.

“In the first place, it is worthy of consideration whether the changes made on the rules were ultra vires of the powers of the society, or, in other words, they did not fairly lie within its proper sphere of action. Now, after a careful examination of the new rules, I am unable to see anything in them, beyond the powers of the society, when the circumstances in which it was at the time placed are duly considered. It was in pecuniary difficulties, insomuch that unless some effectual measures were taken, it would speedily drift into liquidation, and the interests of all concerned, including those of the pursuer, would, to say the least of it, become seriously imperilled. If the society had no power to make certain changes on the rules to meet a case of this kind, all that can be said is, that its constitution was very defective, and quite unfitted to meet such contingencies as might reasonably be expected. I have no doubt that it possessed such powers, for there is nothing in its constitution inimical to that view, and I cannot see that the mode in which they were exercised was at all at variance with the best interests of all concerned. A sacrifice to some extent had to be made, but the sacrifice was no greater than that with which we are familiar in many other associations where a resolution is come to for the creation of preference stock. Yet however much the society might be empowered to make changes on the rules, it would still be a question whether those changes were made in due conformity with the provisions in its constitution to that effect. If they were not so made, a very strong reason could be urged against their validity. In the present case, however, no such question arises. It is not disputed that the change in the rules was made in conformity with provisions to that effect. A general special meeting to consider the proposed changes was convened, and due notice was given to all members, including the pursuer. At that meeting the new rules were adopted without dissent on anyone's part, and thereafter they received the sanction of the registrar also in proper form. The only thing that could be said against them is, that the pursuer was not present at the meeting, not because he did not get due notice, but because he did not choose to attend. He knew, however, before the meeting what the proposed changes were, and he knew directly afterwards that these changes had been adopted, yet he took no protest against what had been done either at the time or subsequently—not even at the general annual meeting that soon afterwards followed. He did nothin g for eight months which could show his objection to the said rules. But he allowed the society to go on and continue its operations under the new rules without taking any objection. He even gave notice of withdrawal without stating any objections to the new rules, although he well knew that these very rules, if followed, would seriously affect his claims on withdrawing. It was only when he made the claim for which he now sues, and when he was met by the answer that he was not entitled to it under the new rules, that he for the first time raised any objection to their validity. It must, I think, be held, in these circumstances, that the pursuer has acquiesced in, and, as far as he could, homologated these rules as valid, and if that is so, his plea that their validity is a question that cannot be dealt with by the arbitrators falls to the ground, inasmuch as no such question now exists.

“If I am right in these views, it seems to follow that the jurisdiction of the Court is ousted by the statutory provisions for determining the questions in issue by arbitration, and that the action falls to be dismissed.”

The pursuer appealed to the Court of Session.

At the discussion the argument was, by the desire of the Court, confined to the question whether there was such a refusal to refer as would let in the provisions of section 35 of the Building Societies Act 1874.

Argued by the appellant—The letter of 22d

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December 1883 (quoted in the opinion of the Lord President) was “an application” in the sense of the statute; it was something outwith the rest of the negotiations, and pointed directly to a reference to the registrar. No doubt this was the only letter that could be founded on in support of this contention, but no set form of application was required by the statute, and in the absence of any such requirement the language in the letter founded on was sufficient to constitute an “application” to the respondents for arbitration.

Replied for the respondents—The parties here were not in the position contemplated by section 35 of the Building Societies Act of 1874. That section contemplated the case of one of the parties to the dispute being desirous of having the matter at issue settled by arbitration, and the other party being unwilling to have the dispute so determined, and where an application for arbitration had been made as contemplated by the Act. That was not the state of matters here, as the appellant stated that he desired arbitration, while the respondents were ready and willing to refer the matters in dispute to the registrar; all that they objected to was going before the arbiter with a one-sided statement made up to suit the appellant's case. The matters in dispute were specially suited for arbitration in the manner contemplated by the statute, being matters connected with the internal management of the society.

The Act 37 and 38 Vict. cap. 42, section 35, provides—“That the Court may hear and determine a dispute in the following cases—1. If it shall appear to the Court, upon the petition of any person concerned, that application has been made by either party to the dispute to the other party, for the purpose of having the dispute settled by arbitration under rules of the society, and that such application has not within forty days been complied with.” …

At advising—