Boston & Colorado Smelting Co. v. Smith

13 R.I. 27, 1880 R.I. LEXIS 34

• Court: Supreme Court of Rhode Island
• Decided: May 29, 1880
• Status: Published

Opinion

Dureee, C. J.

This is an action of assumpsit for goods sold and delivered by the plaintiff corporation to the defendants, who are alleged to have been copartners in business at the time of their delivery. The names of the defendants are, first, William T. Smith, and, second, certain persons constituting the firm of Mason, Chapin & Co., to wit: E. Philip Mason, William P. Chapin, Charles S. Bush, and Samuel L. Peck. Two questions, one of which may be decisive of the case, are submitted to the court for determination, preliminarily to the full trial. The first is, whether the following agreement between the defendant, William T. Smith, and the other defendants, is evidence of a copartnership between them.

“ This indenture, made this twenty-fifth day of April, in tbe year eighteen hundred and seventy-eight, between William T. Smith, of Providence, in the State of Rhode Island, of the first part, and Mason, Chapin & Co., of the said Providence, of the second part, Witnesseth : That in consideration of the agreements herein made, the said party of the first part covenants with the said parties of the second part, that on the first day of May, in the year eighteen hundred and seventy-nine, he will pay to them ten per centum of the net profits of the business, carried on during the year preceding the day last named, under the name and style of ‘Elmwood Chemical Works, William T. Smith, Treasurer,’ in consideration of their loan to him of $5,000, or of tbeir indorsements for him to that amount, for and during the year aforesaid, and will also pay to them two per centum of said net profits for each sum of one thousand for which they may indorse for him during said year in addition to said sum of $5,000 ; and that he will conduct said business during said year to the best advantage, and keep accurate accounts thereof upon books which shall be at all times open for examination by them.

“ And that the said parties of the second part, in consideration of the foregoing agreement, covenant with the said party of the first part: that they will loan to him $5,000 for the term of one year, from the first day of May, eighteen hundred and seventy-eight, or indorse his note for that amount, renewable from time to time during said term, and will also during said year, if in their judgment required for the proper management of his business aforesaid, indorse his notes to an amount not exceeding $2,000 in excess of said $5,000.

“In witness whereof, the said parties hereto set their hands and seals, the day and year first above written.

“ Executed in presence of Edgar G. Robinson, Witness to both signatures.

William T. Smith, [Seal.]

Mason, Chapin & Co. [Seal.] ”

The contract, it will be noted, is executory, and of course does not create a partnership between the parties to it until something is done to carry it into effect. We presume, therefore, that the meaning of the question put to us is, Is the contract such that it would create a partnership between the parties to it, if carried into effect according to its terms, or such that, if so carried into effect, it would render the parties to it liable as copartners to third persons? We will consider the question as if so propounded.

If we regard the contract simply as a contract between the parties to it, to be construed as contracts are usually construed, so as to carry out their intention, we think there can be no doubt that it can only be considered a contract for a loan of money or credit in consideration of a percentage of profits in lieu of interest. It gives the lenders no voice in the management, and no interest in the capital, of the business. It gives them only a percentage of the profits for a single year in a continuing business. It is true they are to have the right to inspect the books, but only for information. The contract calls the business his, i. e. the borrower’s, and it remains exclusively his, as much during the continuance of the loan as before or afterwards. The contract, as between the parties to it, is, therefore, simply a contract for a loan of money or credit, and if, when carried out, it renders them liable as copartners, it is not because they have agreed to become such, but, independently of their agreement, by force of an arbitrary or artificial rule, or by operation of law.

The plaintiff corporation contends that the members of the firm of Mason, Chapin & Co. have, by sharing or being entitled to share the profits of the business carried on by Smith, become, if not actual copartners with him, at least liable with him as copartners to third persons for the debts contracted by him in the prosecution of his business.

The position taken by the plaintiff corporation has the support of tbe earlier English and of numerous American decisions, and, previous to the decision of Oox v. Hiclcman in the House of Lords, in 1860, was so well established that Judge Story, in his work on the Law of Partnership, while he questions whether it would not have been “ more conformable to true principles, as well as public policy, to have held that no partnership should be deemed to exist at all, even as to third persons, unless such were the intention of the parties, or unless they had so held themselves out to the public,” declares, nevertheless, that “the common law has already settled it otherwise,” and that “ therefore it is useless to speculate upon the subject.” Story on Partnership, § 36. The ground of the doctrine was that a person who shares the profits ought to share the losses, because he takes a part of the fund out of which the losses are to be paid. But the ground will not bear examination; for, in point of fact, the losses are no more payable out of the profits than out of the capital, and in other cases it has been decided, quite inconsistently with this ground, that it is only a participation in the net, not the gross, profits, which makes the participant a quasi partner. Other grounds, but none more satisfactory, have been suggested. Indeed, the doctrine, though well received by some judges, appears to have been always regarded by others as an anomaly or legal solecism. It was soon relaxed in favor of agents or servants, who, it was held, might take a share of profits by way of compensation for their services without becoming quasi partners. The English courts, however, refused to extend the exception to cover a loan of money, though upon principle it is impossible to discern any difference whether a portion of the profits goes to pay for services or for money contributed to the business. Mr. Lindley, in his excellent work on Partnership, suggests that this difference of decision was owing to the statutes against usury, because in many cases a loan of money for a share of profits could only be upheld by regarding the lender as a partner. Lindley on Partnership, 3d ed. 23-25.

Such was the state of the law, as it was generally understood, or, to put the matter as some of the later English judges prefer to put it, as it was generally misunderstood, when, in 1860, the House- of Lords decided the case of Cox v. Hickman, 8 H. L. 268. The gist of that decision was that a mere participation in profits does not make the participant a partner unless he has in fact agreed to become such, but is only primé facie evidence that he is such, and is rebuttable by counter-proof to be found in the contract or transaction or in the circumstances connected with it. The real question is, it was held, Did the person who is sought to be charged on account of his participation in the profits ever enter into the relation of copartner with the other participant, or, in other words, do they participate on the common footing of principals in the business ? And, in explication of the question, it was said that the law of partnership is a branch of the law of agency, inasmuch as, wherever an actual partnership exists, the partner who ostensibly carries on the business does it for- himself and as agent for his copartners; or, to put the matter in another form, he and they carry it on through him on their joint account, so that in law, on the principle of agency, whatever he does in the prosecution of the business they do, and whatever debts he contracts they contract with him. In Holme v. Hammond, L. R. 7 Exch. 218, 230, it is stated that the import of the opinions delivered in the House of Lords in Cox v. Hickman is correctly summed up by O’Brien, J., in Shaw v. Galt, I. R. 16 C. L. 375, thus: “ The principle to be collected from them appears to be, that a partnership, even as to third parties, is not constituted by the mere fact of two or more persons participating or being interested in the net profits of a business; but that the existence of such partnership implies also the existence of such a relation between those persons as that each of them is a principal and each an agent for the others.”

The doctrine promulgated in the decision of Cox v. Hickman has been developed and applied in England in many subsequent cases, and may now be regarded as established law in that country. Bullen v. Sharp, L. R. 1 C. P. 86; Holme v. Hammond, L. R. 7 Exch. 218; Mollwo, March Co. v. The Court of Wards, L. R. 4 P. C. 419; Pooley v. Driver, L. R. 5 Ch. Div. 458; Ex parte Tennant, L. R. 6 Ch. Div. 303, the substance of which is stated in Hart v. Kelley, 83 Pa. St. 286, 290; Lindley -on Partnership, 3d ed. 35-47. The doctrine has likewise been laid down or approved in many American cases. Hart v. Kelley, 83 Pa. St. 286; Harvey v. Childs & Potter, 28 Ohio St. 319; Smith v. Knight, 71 Ill. 148 ; In re Francis, 2 Sawyer, 286 ; 7 Nat. Bankr. Reg. 259; Williams v. Soutter, 7 Iowa, 435; Polk v. Buchanan, 5 Sneed, 721; In re Ward & Co. 8 Reporter, 136; Richardson v. Hughitt, 76 N. Y. 55. Indeed, it has been maintained that the American cases, generally, have never gone to the same extent as the earlier English cases. Eastman v. Clark, 53 N. H. 276.

Some of the cases above cited are stronger than the case at bar. Bullen v. Sharp is such a case. In Mollwo, March Co. v. The Court of Wards, the borrower agreed to carry on the business, subject to the control of the lender in several particulars, and to pay the lender twenty per cent, of the profits until the advances were repaid with twelve per cent, interest, and yet it was held that no partnership was created, the primary purpose being security for the loan. In Polls v. Buchanan, the lender was to have one fourth of the net profits for his accommodations, which were to continue for two years, and to have the product of the business placed under his control, and yet he was held not to be a partner. In Williams v. Soutter it was held that a loan of two thousand dollars, to be repaid at tbe expiration of a year, with interest at the rate of thirty per cent., or one third of the net profits of the business, did not make the lender a copartner with the borrower. In Cox v. Hickman, Lord Chief Baron Pollock supposes, as a case in which a partnership would clearly not exist, the case of a loan to be repaid by the application of one half the profits as they might arise, the lender to have the power to see that the profits were applied. If these cases are law, we do not see how it can be held that a copartnership would result from carrying out the contract in the case at bar.

In Pooley v. Driver, L. R. 5 Ch. Div. 458, 474, 488, there was an agreement by the recipients of the accommodation to carry on the business “ to the best of their ability.” The court relied on this, in connection with other features of the contract, to show that a partnership was in reality created under the cover of a loan. For the law will not tolerate any evasion, but wherever the agreement creates as a matter of fact the relation of partnership, no mere words to the contrary will prevent, as regards third persons, its having, its legitimate consequences. Ex parte Del hasse, L. R. 7 Ch. Div. 511. In the case at bar, however, we find no reason to suspect any latent design to create a partnership under the disguise of a loan; for though there is here, as in Pooley v. Driver, an agreement on the part of the borrower to carry on the business to the best advantage, we do not think it affords any inference that a partnership was intended, for it is scarcely more than the law itself would require, namely, that the borrower shall conduct with good faith, and it is certainly less significant than the stipulations given in some of the cases above cited. And see Ex parte Tennant, L. R. 6 Ch. Div. 303. The lenders make it a condition of the loan that the borrower shall carry on the business to the best advantage, because they are dependent on him, the business being his and not theirs.

The plaintiff contends that there is a distinction between an agreement for participation and actual participation, and that while the former may be only primd facie, the latter is conclusive, evidence of partnership. * We do not find that the distinction is well founded in either reason or precedent. It certainly is not well founded if partnership is a fact dependent on agreement, and not a mere matter of legal imputation, and, as we understand the current of modern decision, it is such a fact; and the only case in which a person, who is sought to be charged as a partner, is precluded from proving the actual fact, is when he has held himself out, or permitted himself to be held out, as a partner;

The plaintiff also contends that, inasmuch as participation in profits, if not conclusive, is at least primd facie evidence of partnership, it is for the jury to say whether the defendants are partners or not. This may be so if there is testimony, outside the contract and its execution, going to show the existence of a partnership. But if there is no such outside testimony, if all that the members of the firm of Mason, Chapin & Co. have done is to carry the contract into effect according to its terms, then the question is wholly for the court; for nothing done in execution of the contract could create a partnership unless the contract is itself a contract for a partnership, and whether it is or not, it being in writing, is simply a question of legal construction.

The Roman law and the modern foreign law, Judge Story says, do not create partnerships, as to third persons, between parties, without their consent; and therefore, he adds, the common law appears to have pressed its principles to an extent not required by, if it is consistent with, natural justice. Story on Partnership, § 37. If Judge Story were living to-day, he would doubtless rejoice to find that the common law, as expounded by the highest judicial tribunals in England, does not diverge from the Roman and modern foreign law, nor from natural justice, so widely as he had inferred from the earlier English cases. It is certainly a great advantage to have the law in harmony with natural justice. A law that no person can share in the profits of a business without becoming liable as a partner for its losses is not such a law, for it subjects men, without any fault on their part, to liabilities, as if by contract, which they never contracted. In this State there is no reported decision which is inconsistent with the later English cases, and we think the later English cases are to be accepted as the truest and most authoritative exposition of the common law.

Taking then the first question to be as previously stated, namely: would the contract, if carried into effect according to its terms, make the parties to it copartners, or render them liable to third persons as copartners ? We answer it in the negative.

The second question arises thus. The action is assumpsit for goods sold and delivered. The goods were sold by contract under seal, executed May 1, 1878, by the plaintiff and the defendant Smith, and were subsequently delivered under it. The contract purports to be simply the individual contract of Smith with the plaintiff. The defendants contend that assumpsit cannot be maintained. The question is, Can it be maintained ?

Ordinarily an action of assumpsit does not lie for money due on’a contract under seal so long as an action can be maintained on the specialty. Gilman v. School District, 18 N. H. 215 ; Clendennen v. Paulsel, 3 Mo. 230 ; Brown v. Grauss, 10 Mo. 285 ; Young v. Preston, 4 Cranch, 239 ; Pierce v. Lacy, 23 Miss. 193 ; Hawkes v. Young, 6 N. H. 300 ; Wilson v. Murphey, 3 Dev. 352; Shack v. Anthony, 1 M. & S. 573; Bvans v. Bennett, 1 Camp. 300, 303, note. The reason is because assumpsit lies only on simple contracts, and when a contract by specialty exists, all simple contracts of the same purport are merged in it. If, therefore, the action' were against Smith alone, we think it clearly could not be maintained, and of course it cannot be maintained against him and others unless they were copartners with him. The question is, then, can it be maintained against him and others if they were his copartners ? There is in our opinion an insuperable obstacle to it/ For if he is not liable individually in assumpsit because he is liable on his contract under seal in the higher form of action, how can he be liable jointly with others ; the cause of action, which originally came into existence under the contract under seal, remaining always one and the same ? We do not see how he can, consistently with the rules of pleading or with the rule that the same cause of action cannot exist at the same time as a simple contract and as a specialty., It is only in case the contract under seal could be regarded as collateral to an implied contract on the part of all the defendants that the action could lie, but it cannot be so regarded because it is itself the original or principal contract, and being express leaves no room for any contract by implication. Banorgee v. Hovey, 5 Mass. 11; Kimball v. Tucker, 10 Mass. 192 ; Blume v. McClurken, 10 Watts, 380; Eames v. Preston, 20 Ill. 389. The plaintiff has cited numerous cases, of which the three following are most in point: Cram v. Bangor House Proprietary, 12 Me. 354; Van Deussen v. Blum, 18 Pick. 229 ; Fagely v. Bellas, 17 Pa. St. 67. In the first of these cases the contract was for the benefit of a corporation, but was signed and sealed by its agents with their own names and seals. It. was held that an action of assumpsit would lie against the corporation, which had received the benefit of the contract. „ The court appear to treat the sealed contract as if it were not binding either on the corporation or its agents, and if this was so, the decision was right beyond any question. Moreover the action was against the corporation alone, and not against any person who signed the contract under seal. In the second case the action was debt, not assumpsit. The declaration contained, besides a special count on the contract, general counts for work done and materials furnished, and the court permitted the plaintiff to recover on the latter counts, notwithstanding the contract was under seal and signed in the firm name by only one of the partners. The case appears to have been decided without regard to the previous and thoroughly considered case of Banorgee v. Hovey, the contract apparently being considered a nullity, whereas it was, according to the precedents, the deed of the partner who signed it.- The case of Fagely v. Bellas is directly in point, but it is a mere decision without reasons assigned or precedents cited. We do not think these -cases ought to control our decision. The contract here was executed by Smith in his own name, and there can be no doubt that he is individually bound by it. There are cases which hold that where the partner who executes the obligation is insolvent, the other partners may be reached in equity, there being no remedy against them at law. Purviance v. Sutherland, 2 Ohio St. 478 ; Linney’s Adm’r v. Dare’s Adm’r, 2 Leigh, 588 ; Sale v. Fishman, 3 Leigh, 548; Weaver v. Tapscott, 9 Leigh, 424, 426; James v. Bostwick, Wright (Ohio), 142; Wharton v. Woodburn A Dev. & B. 507. These decisions rest on the assumption that at law an action will lie only on the specialty. And we think if there is any remedy-against the non-executing partners it is in equity.

James M. Ripley Gteorge Fuller, for plaintiff. Tillinghast Fly, for defendant Smith. Fdwin Metcalf, for the other defendants.

We think, therefore, there being no claim that the goods were furnished otherwise than in fulfillment of the contract under seal, without any variation or abandonment of it, that the plaintiff cannot maintain an action of assumpsit.

The plaintiff must therefore, agreeably to the agreement, become nonsuit, and judgment must be entered for the defendants for their costs. Judgment for defendants for costs.