Cox v. Hickman (1860)

Before 1860 English law was thought to contain a rule that a man who took a share of the net profits of a trade was liable to its creditors as a partner. The rule had been stated with distinctness by Eyre C.J. in Waugh v. Carver (1793), on the reasoning of Grace v. Smith (1775) that by taking part of the profits he takes from the creditors part of the fund which is their proper security for payment of their debts. That reasoning produced hardship, and to escape it the courts had built an equally arbitrary distinction between a right to participate in profits generally, and a right to a salary or commission proportionate to a given quantum of the profits.

Cox v. Hickman dissolved the rule. It replaced a presumption of law with a question of fact and intention, and it relocated the ground of a partner's liability from profit-sharing to agency. Every later case in this module — Mollwo, March, Holme v. Hammond, K.D. Kamath — is worked out on the principle this case supplies, and s. 6 of the Indian Act, with Explanation 2, is that principle in statutory form.

Smith and Smith carried on business under the name of B. Smith and Son. They got into difficulties and called a meeting of their creditors. They then executed a deed of arrangement dated 13 November 1849 in favour of their creditors. The parties were Smith and Smith of the first part; five of the creditors, including Cox and Wheatcroft, of the second part; and the general body of creditors of the third part.

The deed provided that the five creditors of the second part were to carry on the business as trustees for the creditors, under the name of The Stanton Iron Company, and to divide the net income of the business, after paying the expenses, rateably among the general creditors of Smith and Smith. A majority in value of the creditors present at a meeting had power to make rules as to the mode of conducting the business, or to order its discontinuance. When all the debts had been paid, the trustees were to hold the assigned property in trust for Smith and Smith themselves. The deed also contained a covenant by the executing parties not to sue Smith and Smith for their debts.

Cox never in fact acted as a trustee, and Wheatcroft resigned six weeks after the deed — before the goods for which the bills were given had been supplied — and no new trustees were appointed in their place. The remaining three of the five creditors carried on the business under the deed. Hickman supplied goods to the business and drew three bills of exchange for them, which were accepted on behalf of the Stanton Iron Company by one of those three.

Hickman sued Cox and Wheatcroft on the bills, alleging that they were liable as partners in the Stanton Iron Company because they were two of the five original parties of the second part and had executed the deed.

The Court of Common Pleas held for Hickman. The Judges in the Exchequer Chamber were equally divided, so that judgment stood. Cox and Wheatcroft appealed to the House of Lords.

1. Is participation in the net profits of a trade a rule of law making the participant liable to the creditors of that trade as a partner?
2. If not, what is the true ground of a partner's liability for the acts of those carrying on the business?
3. Do creditors who merely permit their debtor, or trustees for their debtor, to carry on the trade and apply the profits in discharge of their demands become partners?

The judgment was reversed. Cox and Wheatcroft were not liable.

Lord Campbell L.C. put the matter shortly. The defendants never acted or held themselves out as partners in the new firm. The creditors of the old firm, by executing the deed, plainly never intended to incur such a liability, and the creditors of the new firm cannot be supposed to have dealt with it in the belief that they had a remedy against the creditors of the old firm. Nor were the old creditors partners between themselves; they could derive no profit from the new business beyond payment of the debts due to them from the old firm. Although there was a formal release of those debts, the court must look at the real nature of the transaction according to the understanding of all who were parties to it: the business was to be carried on by the trustees until the debts were paid, and then to be transferred back to Smith and Smith. The creditors had not, by executing the deed, authorised the trustees as their agents either to purchase the goods or to accept the bills.

Lord Cranworth supplied the reasoning that made the case famous. Three propositions matter.

First, the liability of one partner for the acts of his co-partner is in truth the liability of a principal for the acts of his agent. Where two or more persons are engaged as partners in an ordinary trade, each has an implied authority from the others to bind them all by contracts entered into according to the usual course of business in that trade. Partners may stipulate among themselves that only one of them shall make particular contracts, or that only the contracting partner shall be liable; but with such private arrangements third persons dealing with the firm without notice have no concern. The public have a right to assume that every partner has authority from his co-partners to bind the whole firm in contracts made according to the ordinary usages of trade — and this applies not only to persons acting openly as partners but to secret or dormant partners.

Second, profit-sharing is evidence, not the ground of liability. It is often said that the test whether a person not ostensibly a partner is nevertheless in contemplation of law a partner is whether he is entitled to participate in profits. That is in general a sufficiently accurate test, because a right to participate in profits affords cogent, often conclusive, evidence that the trade in which the profits were made was carried on in partnership for or on behalf of the person claiming. But the real ground of the liability is that the trade has been carried on by persons acting on his behalf. It is not strictly correct to say that his right to share the profits makes him liable for the debts. The correct statement is 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 on his behalf — that he stood in the relation of principal to the persons ostensibly trading.

Third, on that footing the creditors were not partners. The mere concurrence of creditors in an arrangement under which they permit their debtor, or trustees for their debtor, to continue his trade and apply the profits in discharge of their demands does not make them partners with the debtor or the trustee. The debtor remains the person solely interested in the profits, save 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 elsewhere.

A person is liable as a partner because the trade was carried on by others acting on his behalf, so that he stood in the relation of principal to them. A right to share the net profits is strong, often conclusive, evidence of that relation, but it is evidence only, and creditors who permit a trustee to carry on their debtor's business and apply the profits to their debts do not thereby become partners.

The principle is enacted in s. 6. The main paragraph requires regard to be had to the real relation between the parties as shown by all relevant facts taken together — the rejection of the arbitrary presumption. Explanation 2 puts the negative side in terms: receipt by a person of a share of the profits of a business, or of a payment contingent upon or varying with profits, does not of itself make him a partner. The four instances the Explanation then gives — the lender of money, the servant or agent taking remuneration, the widow or child of a deceased partner taking an annuity, and the previous owner taking the price of the goodwill — are the recurring fact patterns of the pre-1860 case law, disposed of by statute.

The positive half of the principle is in s. 4, in the words carried on by all or any of them acting for all, and in s. 18, which makes a partner the agent of the firm for the purpose of its business. So the two halves of Cox v. Hickman are in the Act: profit-sharing is not enough, and mutual agency is what is.