Contract-ii Project.docx

Dr. RAM MANOHAR LOHIA NATIONAL LAW UNIVERSITY, LUCKNOW Session-2017-18

CONTRACT LAW PROJECT ON

“S.W. Cox and D. Wheatcroft V. John Hickman (1860) VIII House of Lords Cases (Clark’s) 268 11 E.R. 431 1860”

Submitted to:Dr. Visalakshi Vegesna

Submitted by:Alok Bhardwaj and Aman Rai

Asst. Professor (Law)

Roll No. 23 and Roll No. 24

Dr. RMLNLU, Lucknow

B.A.LL.B.(Hons.)-IIIrd Sem

ACKNOWLEDGEMENT I would like to extend special thanks and gratitude to my teacher Dr. Visalakshi Vegesna who gave me this golden opportunity to work on the case “S.W. Cox and D. Wheatcroft V. John Hickman”. Throughout the research period I have been guided by my teacher. I’d also like to convey my regards to Library Staff of my university for helping me out and getting relevant material for me. I would like to thank my university Dr. Ram Manohar Lohiya National Law, for giving me the chance to be a part of an unique research oriented curriculum which indeed boosts the understanding of the subject. I would also like to thank my parents, mentors and well-wishers who have been a constant support and have time and again reviewed my work and have provided their insights on the matter.

STATEMENT OF FACTS For some time, previously to the year 1849, Benjamin Smith and Josiah Timmis Smith carried on business at the Stanton Iron Works, in Derbyshire, as iron masters and corn merchants, under the name of B. Smith and Son. In that year, they became embarrassed in their circumstances, and a meeting of their creditors took place. Among these were Cox and Wheatcroft. On the 13th November 1849, a deed of arrangement was executed by more than six-sevenths in number and value of the creditors. The parties to this deed were the Smiths, of the first part; Francis Sandars, John Thompson, James Haywood, David Wheatcroft, and Samuel Walker Cox, all of whom were creditors, of the second part; and the general creditors (including those previously named as trustees), whose names were also set forth in a schedule, of the third part. The deed recited a lease from 1846 for twenty-one years to the Smiths, that they were unable to pay their debts, and that it had been agreed that there should be an assignment by them to the parties of the second part, as trustees on behalf of the creditors, to have and hold the premises for the term of the lease, the machinery, etc., and all the estate, etc., subject to the powers and provisions thereinafter contained. The trusts were then enumerated, and, in substance, they were to carry on the business under the name or style of “The Stanton Iron Company,” with power to do whatsoever was necessary for that purpose, and to pay the net income, after answering all expenses; which net income was always to be deemed the property of the two Smiths, among the creditors of the Smiths. And provision was made for the meetings of the creditors; and, at any such meeting, a majority in value of the creditors present was to have the power to make rules as to the mode of conducting the business, or to order the discontinuance of it. And when all the debts had been paid, the trustees were to hold the trust estates, etc., in trust for the two Smiths. The deed contained a covenant by the parties executing it, not to sue the Smiths for existing debts. Cox never acted as trustee; and Wheatcroft resigned six weeks after the execution of the deed, and before the goods for which the bills were given had been supplied; no new trustee was appointed in the room of either. The business of the company was carried on by the three other persons named as “parties of the second part.”. Hickman drew three bills of exchange for the goods supplied by him, those bills were accepted on behalf of the Stanton Iron Company by one of the above-mentioned three creditors. Hickman sued Cox and Wheatcroft on those three bills, and alleged that they were liable upon them as partners in the business of the Stanton Iron Company

because they were two of the five creditors who were the original parties to the deed of the second part and had executed the deed accordingly.

ISSUES RAISED The only issue in this case is whether the defendants by executing the deed of 13th November, 1849, as creditors of Messrs. Smith & Co., rendered themselves liable to the creditors who should afterwards deal with the trustees appointed by this deed to carry on the concern of Messrs. Smith & Co., under the new firm of “The Stanton Iron Company.”

Journey of the case Lower Court under chief Justice Jarvis favours the defendant as Hickman couldn’t establish partnership of Cox and Wheatcroft. The court held that there was no partnership created by the deed and that consequently Cox and Wheatcroft cannot be sued on the bills as partners in the company and they cannot be sued for goods sold and delivered there being no distinction upon .the question of liability between the bills and the consideration for which they were given. Higher Court rules in favour of the Hickman and the Court said that each creditor, though having only a limited interest has an indefinite liability. Court of Exchequer had 6 Judges where the verdict was 3:3. The case finally moved into the House of Lords with six judges: Lord Chief Pollock, Justice Wightman, Justice William, Justice Crompton, Baron Channell and Justice Blackburn.

CONTENTIONS The counsel for Wheatcroft contended that: 1. There was no action against the appellant, as if Hickman had heard that Cox and Wheatcroft were the trustees, he would have realized that Cox had never been a trustee and Wheatcroft had resigned. 2. The ownership of the partnership never changed and was still owned by the Smiths. 3. A qualified benefit derived from a trade does not make a person a partner in it. Here, unless the profits are taken, there exists no partnership. The counsel for Cox contended that: 1. The defendant can be held liable only if: a. He put his name on the bill b. Authorized someone else to put their name on the bill c. Held himself to have given the authority As to the first and third points he is not liable and as far as the second is concerned, the defendant cannot be held liable unless an agency is proved. 2. It is up to the defendant to show that the plaintiff is a partner. The counsel for Hickman contended that: 1. There was a contract of partnership under which business was to be carried out for the benefit of creditors 2. The scheduled creditors are allowed to participate in the profits of the firm thereby making them partners 3. Any one of the partners may bind all the others by the acceptance of the bills in the regular course of business

FINAL JUDGMENT Final judgment was pronounced by the House of Lords by reversing the previous judgment in which defendants were held liable. This judgment held that defendants are not liable as the acceptors of the bills of exchange because they were not the partners in the Stanton Iron Company and they didn’t authorize the trustees to put their names on the bill as acceptors. This judgment made a new principle that just to get share in the profit can’t make someone partner if the intention is not there to make a partnership. COURT’S COMMENT This case was decided by 11 judges and the final judgment was in favour of the defendants/appellants and each judge had his distinct opinion about the liability of the defendants/appellants. The question that was to decide by the judges is “Are the Defendants in this case liable as acceptors of the bills of exchange declared upon?” Here, in this part of the project, author will try to put the genuine opinion expressed by each judge. Opinion expressed by Mr. Justice Blackburn: He held that defendants/appellants were liable on the acceptance of bills of exchange. According to him, question of liability is depending upon nature of deed. If nature of the deed is such that persons after executing it give authority to those who in practice manage the Stanton Iron Company to bind them to the third who in practice manage the Stanton Iron Company, then they are liable, and if the effect of the deed is not such that then they can’t be held liable. To ascertain that whether creditors included the defendants constituted the partnership or not, He analyzed the essentials stipulations of the deed and he concluded that “the business is to be carried on by the trustees under the control of the creditors, who may give what directions they think fit for the proper management of the business, that the creditors have a voice in nominating fresh trustees in case they are changed; and that the creditors are to have a right to inspect the books. And moreover, only the creditors have these powers, no similar powers have been given to the Smiths. Then, the trustees are bound to pay over the net income, after paying all expenses of the concern, rateably among the creditors. Thus according to him, essential stipulations of the deed to which creditors and defendants are parties, are that the business shall be carried on for

their benefit, and under their control; that they shall be intere1sted in all the property of the firm to such an extent as to have a partnership lien upon it. These essentials show that they are not merely persons permitting the Smiths or the trustees to carry on the business, and relying on it for payment, but that they take the profits, and because of the share in the profits1 and control over the firm they are partners as regards third persons and liable to losses of the firm. After concluding that creditors as partners, a question arise that whether they gave any authority to the trustees to bind them for the usual acts of firm against the third party? To answer this question, He expressed that all cases related to partnership also include the element of Agency and those who are partners in the firm do confer the prima facie authority to those who practically manage the firm to make all contracts which in the exigency of the business are necessary and proper and customary. This prima facie authority can be restricted expressly but if the third parties who deal with the managers of the firm don’t have the notice of such restriction, they are entitled to hold all who are partners bound by the prima facie authority conferred on the manager. According to him, in the present case, the accepting of bills is a necessary and customary part of the business, the authority to accept them is conferred as much as the authority to contract the debts for which they are given. And this authority bound the defendants as they are the partners in the firm. Opinion of Mr. Baron Channell: He held that defendants/appellants were not liable as the acceptors of the bills of exchange as they were not the partners in the firm. According to him, defendants didn’t act as trustees when the bills were accepted, so their entire liability depends upon deed that if deed constitute them as partners to the third partners then they are liable because then the principle of agency would be applicable and if deed doesn’t constitute them as partners then they are not liable. He expressed that the new firm under the management of the trustees is not new trade or concern rather it is the old concern, though carried on under the management of trustees, and under a new name, but it was the business of the Smiths. The creditors agreed to forego their rights to initiate the legal proceeding against the Smiths in consideration that their business for the future should be carried on by the trustees, and not under the management of the Smiths and the creditors will

1

Waugh v carver 2 H.V.L. 235.

receive the sum equivalent to their debts from the profits of the business. The business was the business of the Smiths, carried on with a view to their ultimate benefit of payment of their debts from the net profits of the business. There was no benefit to creditors as they were just getting the repayment of their old debts and no further profits was given to them. This means that they were interested in the profit to the extent of their debts and not further. While concluding his opinion he said that “the present agreement by a debtor with his creditors, to apply net profits in payment of old debts, and on the part of the creditors to give up their rights to be paid out of the capital, taking their chance of being paid out of the net profits which may be made after payment of new debts, does not create, as regards third persons, a partnership, such third persons not knowing of the arrangement, and not having trusted the creditors, and the creditors not having held themselves out to such third persons as parties liable.” Opinion of Mr. Justice Crompton: He held defendants are liable as acceptors of the bills of exchange because they were interested in the profits of the new business and had a control over it. According to him, Stanton Iron Company was not an old firm rather it became a new firm after the deed of arrangement between debtors and creditors with the control of new partners as creditors and came under the management of new managers as trustees for the ultimate benefits of the creditors. The creditors had the entire control of the business. They were expressly empowered to give any “orders or directions for the present or future management;” they were to direct the continuance or putting an end to the business, and to make any composition as to debts and as to the property, and they were the only persons to whom the managers can look for funds in the event of the property left in the concern being lost or insufficient. And creditors had benefited as net-profit of the business was applied to their debts that they lent to the Smiths. And it is the established principle that partners are liable for the debts of their business. However, for the liability of the Smiths as plaintiff/respondent contended that they are also partners in the new business, He decried this possibility because they were neither interested in the profits of the business nor had the responsibility of the management of it. They, in fact, sold their business and creditors carried it on through trustees for their own benefit. Creditors alone had the sole interest in the profit and that’s why they are liable. Opinion of Mr. Justice Williams: He held that defendants are liable as the acceptors of the bills. He made his opinion on the two points first, whether the creditor are the partners in the

Stanton Iron Company, and second, if they are partner then whether they can be held liable as acceptors of the bills. To answer these issues, he expressed his opinion that in fact, creditors bought the goodwill of the old business for limited time and started to carry it on under new name, new partners and new managers as trustees to apply the net profit of the business in repayment of their debts. They had the real control over it, they only had the power to make the rules for better functioning of the business, they had the discretion of carrying it on or to discontinue the business and even they had the power to discharge the trustees or to appoint a new one. Also they were interested in the profits of the business. With these constructive, he concluded that creditors are the partners in the firm. To answer the second issue, he said that in the business carried on under the trust deed must be regarded as carried on by the trustees as managing partners for the general body of the partners and if this is the case then every partner in the present case i.e. the creditors are liable for accepting the bills by the trustees as any act of the managing partner has the binding authority over the general body of the partners. Opinion of Mr. Justice Wightman: He held that defendants are not liable on the acceptance of the bills of exchange. According to him, the question for consideration is that whether the creditors are the partners with the trustees in the business by virtue of the signing of the deed or whether they were the principle and trustees were their agents. He expressed his opinion that in some cases it may be possible that a person who shares in the profits of the business is a partner but this is not the exclusive test for deciding the partnership. In the present case, creditors merely obtain payment of their debt and no more, out of the profits of the business, and can’t be said to share the profits. “If in the present case, the property of the Smiths had been assigned to the trustees to carry on the business, and divide the net profits, not amongst those creditors who signed the deed, but amongst all the creditors, until their debts were paid, would a creditor, by receiving from time to time a rateable proportion out of the net profits, become a partner? I should think not.” And there was no relationship of principle and agent between the creditors and trustees. This means creditors were interested in the profits of the business to the extent of the repayment of their debts. In the present case, the legal rights and liabilities in respect of the business carried on under the name of the Stanton Iron Company, are

in the trustees, and that at all events the creditors are not liable upon bills drawn and accepted in such a manner as those in question; and that the procuration under which Haywood accepted the bills, is not the procuration of the Appellants, or of the creditors, but of the trustees; and that the Appellants are not liable as acceptors of the bill. Opinion of Lord Chief Baron Pollock: He held that defendants are not liable as acceptors of the bills of the exchange as they were not the partners in the firm. According to Pollock, “the true rule ‘ ex aequo et bono ’ would seem to be, that the agreement and intention of the parties themselves should govern all the cases, if they intended a partner-ship in the capital stock, or in the profits, or in both; then, that the same rule should apply in favour of third persons, even if the agreement were unknown to them; and on the other hand, if no partnership were intended between the parties, then that there should be none as to third parties, unless where the parties had held themselves out as partners to the public, or their conduct operated as a fraud or deceit upon third persons.2 Taking this view of what the law is, it seems to me, that this arrangement, to apply future profits (if any) in payment of the old debts, the creditors being willing to give up their right to be paid out of the capital, and to take the chance of any profits, appears to me not to constitute a partnership as to third persons who know nothing of the deed, and who have not trusted the creditors, and therefore the Defendants below are not, in my opinion, liable as acceptors of the bills of exchange declared upon.” According to him, Iron Company was not a new concern rather an old one but came under the management of the trustees, who were to protect the interests of Smiths on the one hand, from whom they drew their all authorities, and of the creditors on the other, so that the creditors who give up their claim to sue the Smiths for the existing debts, could get the repayment of their debts from the profits of the firm. The trustees acted under the authority of Smith, and they were to to apply the net income (of course, after satisfying all new creditors) in payment of the claims of the old creditors. The creditors had power to call meetings, and direct that the business shall be discontinued and the property sold and divided rateably among the creditors; they had also power to make rules, orders, and directions; but, they had no power to interfere and take the management into their own hands.

2

Story on Partnership (ch.iv.s.49)

This means creditors didn’t have a real control and trustees drew their authority from Smiths and also there was no intention among the creditors to create the partnership for the third parties as they just wanted to get their debts repaid. Opinion of the Lord Chancellor Campbell:

He held that defendants are not liable because

they never intended to be a partner in the new firm. According to him, “the creditors of the old firm, by executing the deed, never intended to incur such a liability, and the creditors of the new firm cannot be supposed to have dealt with this firm in the belief that they could have a remedy against all or any of the creditors of the old firm. Is there here such a participation in the profits of the new firm by the creditors of the old firm, as to make them partners in the new firm? They certainly are not partners inter se, and they could derive no profit from the new business, beyond the payment of the debts due to them from the old firm. There was a formal release of these debts. The business of Messrs. Smith and Co. was to be carried on by the trustees till the debts of that firm were paid, and then the business was to be transferred back to Messrs. Smith and Co.” According to him, if the trustees were authorized to represent the defendants as the acceptors of the bills then they can only be made liable but this circumstance was not present in the facts. Opinion of Lord Brougham: He agreed with the Lord Campbell and held that defendants are not liable. Opinion of Cranworth: He held that the defendants are not liable as they were not the partners in the company. According to him, “it is said that, to participate in the profits of the business, is the test to determine the partnership. This, no doubt, is, in general, a sufficiently accurate test; for a right to participate in profits affords cogent, often conclusive evidence to determine the existence of partnership and his liability to the acts of other partners. But the real ground of the liability is, that the trade has been carried on by persons acting on his behalf. When that is the case, he is liable to the trade obligations, and entitled to its profits, or to a share of-them. It is not strictly correct to say that his right to share in the profits makes him liable to the debts of the trade. The correct mode of stating the proposition is to say that the same thing which entitles him to the one makes him liable to the other, namely, the fact that the trade has been carried on his behalf, i.e. that he stood in the relation of principal towards the persons acting ostensibly as the traders, by

whom the liabilities have been incurred, and under whose management the profits have been made. Taking this to be the ground of liability as a partner, it seems that the mere concurrence of creditors in an arrangement under which they permit their debtor, or trustees for their debtor, to continue his trade, applying the profits in discharge of their demands, does not make them partners with their debtor, or the trustees. The debtor is still the person solely interested in the profits, save only that he has mortgaged them to his creditors. He receives the benefit of the profits as they accrue, though he has precluded himself from applying them to any other purpose than the discharge of his debts. The trade is not carried on by or on account of the creditors; though their consent is necessary in such a case, for without it all the property might be seized by them in execution. But the trade still remains the trade of the debtor or his trustees; the debtor or the trustees are the persons by or on behalf of whom it is carried on.” Opinion of Lord Wensleydale: He held that defendants are not liable as they were not partners in the company and no Principle-Agent relationship was exit among creditors and debtors. He applied the same reasoning as that of Lord Cranworth. Opinion of Lord Chelmsford: He concurred that defendants are not liable.

PERSONAL COMMENTS This case has its own important in the history of partnership cases. According to the facts it is apparent that creditors just wanted their debts repaid and for that purpose they agreed to a deed of arrangement by which they agreed to assist the management of the Stanton Iron Company managed by trustees who would apply the net-profit of the business to repay the debts of the creditors and creditors agreed to forego their right to initiate legal proceedings against debtor. From the facts it can be concluded that creditors never intended to take extra liabilities related to the usual business of the company against the third party and they didn’t want to create the new partnership because the property was still of the Smiths. For example, If a firm was in difficulties, and a person proposed to assist by a loan of money, engaging to receive payment out of the profits only, and to make no claim in the event of there being no profits, but stipulating that some amount of the profits should be applied as they rose in payment of his debt, and that he should have power to see that this was done, would he thereby become a partner, and liable to all debts contracted subsequently to this arrangement? On this very simple state of facts there may possibly arise a difference of opinion, but I think a large majority of all lawyers and of all commercial men would decide at once that assistance so offered and so accepted would not make the lender of the money a partner to third persons. Also to prove that there is partnership exists among some people, test of share in profit is not accurate rather the intention of the persons agreed to share the profit should be taken into consideration otherwise servant will be held as partner of the master because he get his salary from the profit of the master.

CONCLUSION This case has its own important in the history of law governing partnership. Prior to this case, a common perception was prevalent in England regarding the Partnership that if a person is getting share from the profits of some business or firm then he will be deemed as partner in the same. 3 But when this case was decided by the House of Lords then it was held that to determine the partnership was created and that is to determine the partnership, the intention of the parties should be taken into consideration4 and thus true test to determine partnership is that persons are 3

4

Grace v Smith 2 W. Bl. 998. Test of Partnership by Smyth, Constantine J. 11 Geo. L. J. 10 (1922-1923).

held to be partners when they are engaged in a business as joint principals, and have a community of interest in the subject matter of the partnership, and jointly share in the profits of the business, and have equal or similar control in the management of the affairs and the business is carried on their behalf by their agents. This case on large extent made impact upon legislative mechanism of some countries. For example, in England a statute was passed by parliament to the effect that advance of the money by way of loan to a person in trade for share in the profits should not itself make the lender responsible as partners.5 Even the Indian Partnership Act of 1932 was affected by this judgment as some provisions of this act were introduced according to the judgment. for example according to the s.6 of the said act, “in determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together” and just to share the profit is not the conclusive test to determine the partnership. Furthermore, some principles that were held good in nature were also imparted in the IPA of 1932 by stating that each and every partners are the agent of the firm under s.18, each and every partners of the firm are liable jointly and severally for all the acts of the firm under s.25.

5

Test of Partnership by Smyth, Constantine J. 11 Geo. L. J. 10 (1922-1923).

BIBLIOGRAPY

Referred Books: Online Articles: Test of Partnership by Smyth, Constantine J., published in Georgetown Law Journal, Vol. 11, Issue 1, pp. 10-20. Citation- 11 Geo. L. J. 10 (1922-1923), available at http://heinonline.org/HOL/Page?handle=hein.journals/glj11&div=5&start_page=10&collection= journals&set_as_cursor=1&men_tab=srchresults

Referred Websites: https://indiancaselaws.wordpress.com/2012/01/23/cox-v-hickman/ http://www.srdlawnotes.com/2017/01/cox-vs-hickman-1860.html https://www.studyindia.com/Pdf_Viewer/web/pdfviewer.aspx?ID=20986%20&file=3281Coxv_ SI3B1.pdf http://chestofbooks.com/business/law/Case-Method/3-Tests-For-Determining-The-Relation-OfPartnership-A-Control-Over-The-Proper.html