Scottish Court of Session Decisions

Walter Montgomerie Neilson, James Neilson, James Wyllie Guild, trustee on the estate of James Morton, and Andrew Maxwell, as four of the shareholders in the steamship “Loudoun Castle,” raised this action in the Sheriff Court at Glasgow against Thomas Skinner & Company, snipbrokers, St Vincent Place, Glasgow, for payment of their respective shares of £700, alleged to be a commission wrongfully received by the defenders from Messrs Thomson & Company, builders of the ship, and not communicated to the pursuers as joint adventurers in the transaction.

On 9th December 1875 Messrs Thomson wrote to Thomas Skinner—“After going over the several alterations and additions you require in the specification of new steamer sent you by us, we hereby offer to build the same, according to specification as arranged between us, for the sum of fifty-six thousand pounds, nett, to us,” &c. On the same day Mr Skinner wrote to Messrs Thomson accepting the offer, and also upon the same day Messrs Thomson wrote to Mr Skinner—“We agree to pay you a commission of one and a quarter per cent. on the contract price of new steamer.” The commission amounted to £700. It appeared from the correspondence that Mr Skinner was to take 32/64ths and endeavour to dispose of them among his friends, and that the Messrs Thomson were to take or find purchasers for the remaining 32/64ths. The ship was to be ready on 15th January 1877, and on 9th February Messrs Thomson wrote to Skinner & Company—“Dear Sirs—We have yours of yesterday, and now beg to hand herewith the agreement for new steamer signed by our friends for 32/64ths. We append address of the parties.” The names appended included those of the pursuers. From further correspondence it appeared that all the money to be paid for the ship was sent through Skinner & Company. The ship was built and was afterwards managed by Mr Skinner as ship's husband. Upon 15th June 1877 Morton wrote to Skinner & Company—“I duly received yours of yesterday, stating that the book and vouchers of the ‘Dunottar Castle’

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were sent me for my docquet, along with 2s. 10d. of stamps for their being sent to London. I have made a cursory examination, and appended my docquet, and sent the two parcels to your address in London. I would suggest that in order to save trouble to yourselves as well as to the several owners the accounts should in future be audited by a professional accountant, to whom a fee, which would be small, should be paid.” Skinner & Company on 27th June 1877 wrote to the owners of the “Loudoun Castle”—“We consider it advisable, for the benefit of all, to propose that in future a professional accountant should be appointed in London to audit the accounts, and after this has been done to pay the dividends at once, at the same time sending to each shareholder a lithographed abstract of the accounts similar to the form enclosed, which we think conveys all the information likely to be of interest to the owners. At the same time any owner can at any time have the freest access to the books and vouchers, and we shall be happy on all occasions to give any other information that may be desired. We shall be glad, if you are agreeable to the above proposal, if you will sign the enclosed lithographed form and return it to us.” Messrs Broads, Paterson, and May, accountants, London, received the great majority of the owners' votes, and were accordingly selected to act as accountants, and they sent out abstracts of the accounts for the cost of the ship and for the voyages to the owners as arranged. The accounts showed the sum of £700 paid as commission to Skinner & Company by Thomson & Company.

The pursuers averred—“The pursuers have recently learned and aver that the late Mr Skinner, while the shares of the ship were being arranged, stipulated with the builders, without the knowledge or the consent of the pursuers, for payment to himself or his firm of a commission or discount, or other allowance or deduction out of the price of the ship. This agreement was in the circumstances a pactum illicitum. It is believed it was in writing, and defenders are called upon to produce it. Pursuers further aver that defenders, in pursuance of this illegal paction, either did not pay the builders the said price, viz., £56,000 sterling, for the said vessel, or otherwise that they received from the builders deduction, easement, discount, or commission of considerable amount, viz., 1 1 4 per cent. or thereby on the price, viz., £700 sterling more or less from the said price, and they have failed to communicate or pay any portion of the same to their co-owners as they were bound to do. Not known what was submitted to the accountants. Denied that the accountants, if they passed the charge of commission complained of, did so under or in terms of any instructions from pursuers, or that pursuers were in the knowledge that it had been passed. Denied said commission is customary in the trade, or that pursuers knew it to be so.”

The defenders averred—“Explained that at the time when Mr Skinner made the contract with Messrs Thomson for the building of the vessel referred to he was a partner of the defenders' firm, and, in accordance with the custom of the shipbroking trade his firm was entitled to a commission of 2 1 2 per cent. on £28,000, the purchase price of the thirty-two shares undertaken by him, which was equivalent to 1 1 4 per cent. on the price of the whole vessel, or £700, and that it was agreed by Messrs Thomson to pay this commission on the transaction, conform to their letter of 9th December 1875, herewith produced. Explained that this commission was one of the ordinary commissions due to the defenders as shipbrokers for the negotiation of the contract by their partner Mr Skinner, and, for his and their trouble in adjusting the specification, was earned before the pursuers had any connection with the vessel, and was disclosed on the face of the vouchers submitted to the accountants who audited the defenders' accounts on behalf and in accordance with the instructions of the shareholders.

The pursuers pleaded—“(1) The defenders having intromitted with the said ship and funds as before mentioned, are bound to count and reckon with pursuers as part owners as craved, and decree should pass against defenders for such sums as may appear on a full accounting to be the balance due and payable to the pursuers.”

The defenders pleaded—“(3) The defenders having duly accounted to the pursuers and the other owners for their intromissions, and the pursuers have accepted the accounts after the same had been audited on their behalf and in terms of their instructions, and without objection or reservation drawn the dividends brought out therein as effeiring to their respective shares in the vessel, the defenders are entitled to absolvitor from the conclusions for an accounting. (4) Mr skinner not having acted for the pursuers in making the contract with the shipbuilders, the pursuers have no claim to share in the commission referred to on record. (5) The defenders not having acted for the pursuers in regard to the making of said contract, are not liable to account to them for any commission received by them in connection therewith. (6) The said commission being one to which, in accordance with custom, the defenders were entitled as shipbrokers, and, separatim, having been sanctioned by the auditors for the owners, the pursuers have no claim to any share thereof.”

James Thomson deponed—“We were the builders of the ‘Loudoun Castle,’ the price was £56,000. It was with the late Mr Skinner that I arranged the contract. There was a commission of 1 1 4 per cent. given on the price of the vessel, which amounted to £700. (Q) Did Mr Skinner stipulate for that commission?—(A) He did not stipulate for it at first, but that commission was given ultimately; he asked for it, and I gave it in order to get the contract. I believe shipbrokers usually stipulate for commissions when asking for a price… . I handed over to Mr Skinner the letter No. 9/21 of process, in which I say, ‘We agree

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to pay you a commission of 1 1 4 per cent. on the contract price of new steamer.’ We had in previous transactions paid Mr Skinner's firm a commission on steamers that were placed with us. I believe the rate of commission was 2 1 2 per cent. On this occasion the rate was 1 1 4 per cent.; the reason for that was simply that Mr Skinner got only one-half of the stock. I objected at first to any commission, but ultimately I agreed to pay one-half owing to that…. Mr James Neilson, Mr Andrew Maxwell, Mr W. M. Neilson, and Mr James Morton became owners in this vessel through us. About the time the contract was made we were in correspondence with them about taking a part of the holding that we were responsible for. We were not in correspondence exactly, but verbally we talked of it.”

John Annan, clerk with Broads, Paterson, & May, deponed—“My firm audited the accounts from the building of the vessel down to the time when she was ultimately sold by Messrs Skinner… . When I was acting as auditing clerk and taking charge of the audit department I reported the result of my examination to Mr Paterson, one of the partners of the firm. The owners' agreement and the other contract were spoken of to him. … I would certainly mention to him this brokerage of 1 1 4 per cent. It was after due consideration by us, as auditors on behalf of the shareholders that that item was approved of. There was no attempt on the part of Messrs Skinner to conceal the fact from us that there was such a brokerage payable. My firm do a large business as auditors in London. They have done a large business in the auditing of ships' accounts. … I have large experience of the charges that are made by brokers in connection with ship management, and of the charges that are allowed by their shareholders. I can say from my knowledge that the charges which we allowed here for commissions to Messrs Skinner & Company were the usual and ordinary commissions in such shipbroking business.”

John Paterson, a partner of the accountants' firm, deponed—“The question of Messrs Skinner's remuneration was one which was brought prominently under our view in auditing the accounts. I was shown by Mr Annan from time to time documents bearing on the question of their remuneration that he came across in the course of his audit. I believe I was shown the three documents, Nos. 9/10, 9/11, and 9/12, which I see bear on the face of them that Messrs Skinner & Company were getting a commission from the builders at the rate of 1 1 4 per cent. on the price of the vessel. I consider that that was a remuneration that went to Thomas Skinner & Compay, and did not fall to be shared with the co-owners. I did not think it necessary that that should be entered in the abstract of accounts that was issued to the shareholders, because if you had deducted it you would have had to add it again.”

Upon 26th February 1889 the Sheriff-Substitute ( Guthrie) pronounced this judgment—“Finds that the defenders have assumed responsibility for the late partner of their firm, the deceased Thomas Skinner, who acted as managing owner of the ‘Loudoun Castle’ from her building till she was sold: Finds that the pursuers Walter Montgomerie Neilson, James Neilson, and Andrew Maxwell, were co-owners of the ‘Loudoun Castle’ to the extent of four sixty-fourths, four sixty-fourths, and two sixty-fourths respectively, and that the pursuer James Wyllie Guild represents Mr Morton, who was owner of four sixty-fourths shares of said ship: Finds that the defenders, or the said Thomas Skinner, received from the builders of the ‘Loudoun Castle’ a sum of £700 as commission on the building contracts, for which they are bound to account to the pursuers in proportion to their shares: Finds that the defenders duly rendered accounts to the owners of the ‘Loudoun Castle’ from time to time, and that the pursuers have not established against the defenders any of the other objections stated to the accounting: Therefore decerns against the defenders for £153, 2s. 6d., viz., in favour of each of the pursuers Walter Montgomerie Neilson, James Neilson, and James Wyllie Guild for the sum of £43, 15s., and in favour of the pursuer Andrew Maxwell for the sum of £21, 17s. 6d., and quoad ultra assoilzies the defenders: Finds no expenses due, and decerns.

“ Note—…. The point is whether the defenders, who were managing owners and ship's husbands of the steamer ‘Loudoun Castle,’ are bound to account to their coowners for their respective shares of £700, a sum which they (the defenders) received from the builders as commission on placing the contract. The principle which the pursuer seeks to apply is generally stated in language which is found in Story On Agency, section 211, and repeatedly adopted by subsequent writers and judges, viz., ‘That in all cases where a person is either actually or constructively an agent for other persons, all profits or advantages made by him in the business beyond his ordinary compensation are to be for the benefit of his employers.’ The principle has been applied to the case of agents in contracts of sale receiving commissions from the other party, as in Pender v. Henderson, Morrison v. Thompson, Gray's Trustees v. Drummond and Reid, &c. I do not think that the defenders have been successful in their attempt to distinguish this case from those to which I refer. In the first place, it is not proved that the custom of taking commissions in purchasing ships or placing orders for building ships, is so universal as to bring the payment within the category of ‘ordinary compensation,’ or to raise a presumption that it must have been known to the pursuers.

“Neither is it proved that it was in fact known to the pursuers that the defenders were receiving this commission, which truly enhanced the cost of the ship. Mr Maxwell alone of the pursuers was examined, and he did not know. There was a kind of suggestion in argument that as the

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other pursuers were not adduced, it must be assumed that they would not disclaim knowledge. But the defenders might have called these gentlemen if they had desired their evidence; and throughout the case it must be remembered that where one in a fiduciary position takes to himself a benefit from a contract made for his principal, or sells to his constituent what he himself has an interest in, the burden lies on him to prove that he made a full disclosure to the principal of his interest, and did not take advantage of his fiduciary position— Dunne v. English, L.R., 18 Eq. 524; Erlanger v. New Sombrero Phosphorus Company, 3 App. Ca. 1218.

Again, the rule in question is not confined to cases in which the relation of agent and principal, or of trustee and beneficiary, or cestuique trust, is formally and technically established. It is enough if the party who makes the secret profit be ‘constructively’ an agent. The pursuers were really the parties who contracted with Messrs Thomson for the building of the ‘Loudoun Castle.’ I cannot regard them and the other original owners as being mere sub-purchasers from Mr Skinner and Messrs Thomson, as the defenders ingeniously try to make them. The pursuers paid the instalments of the price to the builders as they fell due through the defenders as their agents. And in the inception of the adventure the defenders and their late partner do not differ materially from promoters of companies in various cases, of which Huntington Copper Company v. Henderson may be taken as a sample.

The commission now in question is not, I humbly think, one of those covered by the fourth article of the working agreement, which bears that the allowance thereby stipulated for management ‘shall be irrespective of the ordinary commissions to the firm of Thomas Skinner & Company as shipbrokers.’ This clause naturally refers to commissions earned in the course of trading with the ship, and not to one for bringing it into existence, or for preparing, as was contended, the building contract and specifications.

Again, it was maintained that the pursuers are barred from insisting in their present claim by the fact that accounts which shewed the receipt by the defenders of the £700 in question were passed by the accountants who audited Messrs Skinner's accounts on behalf of the owners. Mr Paterson tells us that he put a certain construction on the owners' agreement, and therefore passed the charges for commission; but he also says that he did not consider it a charge that properly entered the accounts between the owners and their managers. I think that the latter opinion just confirms the construction which I have put upon the clause about commissions, which differs from Mr Paterson's construction of it. However that may be, it is hardly a sound contention that an error of judgment on the part of the accountant who audits the books of the managing owner of a ship, whose province mainly, though not exclusively, is to check the figures and vouchers, bars the co-owners from challenging an illegal charge made against them of which they had no personal knowledge… .

I think that in this litigation success has been so mixed that no expenses ought to be allowed to either party.”

The defenders appealed, and on 22nd August the Sheriff ( Berry) adhered.

The defenders appealed, and argued—The only serious question between the parties was whether Skinner & Company had to repay to the pursuers their proportions of this £700. Skinner contracted with Messrs Thomson that they should build him a ship at the price of £56,000. In order to obtain the money Skinner got certain of his friends to buy 32/64ths of the vessel, and Messrs Thomson agreed to get their friends to buy the remaining 32/64ths. The pursuers were all persons who had bought their shares from Messrs Thomson. It might have been a different case if they had bought them from Skinner. Messrs Thomson agreed to give Skinner a commission in return for the contract, but this commission was not fixed until the price of the vessel had been arranged for. Skinner was not an agent of Messrs Thomson, and did not stand in any fiduciary position to the pursuers, as they had bought through Messrs Thomson. The pursuers required to show before they could recover that the price of the ship had been increased to them by the amount of this commission, but that they had failed to do. There was no concealment of the facts in this case, as the fact that Skinner had received this commission was known to the professional accountant who had been appointed by the shareholders in their own behalf, and it differed therein from the following cases— Huntington Copper Company v. Henderson, January 12, 1877, 4 R. 294; Pender & Company v. Henderson & Company, July 20, 1864, 2 Macph. 1428. The commission here was what was usual, 1 1 4 per cent. upon the whole, but in this case it was calculated at 2 1 2 upon the half of the ship which was disposed of by Mr Skinner.

The respondent argued—The defenders were bound to repay the £700, because in ordering this ship Skinner had acted for the whole of the joint-adventurers, who were the true owners, and among whom were the four pursuers. It did not matter that at the time of the building of the ship the joint-adventurers had not all bought their shares, because the contract was arranged upon the footing that Skinner was to dispose of one-half of the shares and Messrs Thomson of the other half. What was really wanted by Skinner was to get a ship built of which he was not to be the owner but the manager, and make his profit in that way. He was therefore acting as agent for the persons to whom the ship belonged, and on the well-known principle that an agent was bound to account for all moneys received in his employers' service he was bound to pay back this sum of £700 which he had wrongfully got. The case was ruled by that of Henderson,

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quoted supra; Manners v. Raeburn & Veral, June 6, 1884, 11 R. 899; Dunne v. English, L.R., 18 Eq. 524; Erlanger v. New Sombrero Phosphorus Company, 3 App. Cas. 1218.

At advising—