Mollwo, March and Co. v. The Court of Wards (1872)

Cox v. Hickman held that profit-sharing is evidence and not a rule. Mollwo, March is the case that tests how far that survives when the profit-sharer also takes very large powers of control over the business. A financier who takes twenty per cent of the net profits, forbids shipments and sales without his consent, controls the drawing of money, is consulted about the office establishment, may direct its reduction or enlargement, holds the shipping documents at his disposal, and receives all the proceeds of the business, looks a great deal like a managing partner. The Privy Council held that he was not one.

It is also the case that gives the Indian student the two safety valves: holding out, and the warning that a device dressed up as a loan will not save a person who is really trading.

A firm consisting of the two Watsons, trading as W.N. Watson and Co., was indebted to a Rajah for past advances. By a written agreement, the Rajah obtained security for those past advances; and in consideration of forbearance, and as an inducement to him to support the Watsons by future advances, it was agreed that he should receive from them a commission of twenty per cent on profits and be invested with wide powers of supervision and control.

Those powers were considerable. While his advances remained unpaid, the Watsons bound themselves not to make shipments, order consignments or sell goods without his consent. No money was to be drawn from the firm without his sanction. He was to be consulted about the office business of the firm, and might direct a reduction or enlargement of the establishment. The shipping documents were to be at his disposal, and were not to be sold, hypothecated or their proceeds applied without his consent. All the proceeds of the business were to be handed to him for the purpose of extinguishing his debt, and all the Watsons' property, landed and otherwise, was to be answerable to him as security.

Against that stood what he could not do. The Rajah had no initiative power. He could not direct what shipments should be made or consignments ordered, or what the course of trade should be. He could not require the Watsons to continue to trade, or even to remain in partnership. His powers, however large, were powers of control only.

A large balance became due from the firm to Mollwo, March and Co. during the period in which it was said the Rajah was in partnership with the Watsons. They sued him for the firm's debts. It was admitted that the Rajah did not hold himself out as a partner; a statement by one of the Watsons to the plaintiffs that he might in law be a partner by reason of his right to commission on profits was not authorised by the Rajah.

1. Was the Rajah, by the agreement, a partner with the Watsons at least as regards third persons?
2. If not a true partner, were the Watsons his agents in carrying on the business, so that the debt was contracted within the scope of their agency?

The appeal was dismissed. The Rajah was not liable for the debts of W.N. Watson and Co.

Holding out is out of the case. No liability could be fastened on the Rajah on the ground that he was an ostensible partner. It was admitted that he did not hold himself out, and the unauthorised statement of one of the Watsons could not do it for him. His liability therefore depended on his real relation to the firm under the agreement.

The presumption from profits is rejected as a rule of construction. It was argued that participation in net profits was in contemplation of law such cogent evidence of partnership that a presumption arose sufficient to establish that relation as regards third parties unless rebutted. Their Lordships held that rule of construction to be too artificial: it takes one term only of the contract and at once raises a presumption on it, whereas the whole scope of the agreement, and all its terms, ought to be looked at before any presumption of intention can properly be made at all. The old rule from Waugh v. Carver and Grace v. Smith — that by taking part of the profits a man takes from the creditors part of the fund which is their security — was arbitrary and its reason has been rejected as unsound; the same consequence would follow, and in a far greater degree, from a mortgage of the common property of the firm, which certainly would not of itself make the mortgagee a partner.

The case falls within the commission distinction. The Rajah was not entitled to a share of the profits as such, and had no specific property or interest in them as profits; subject to the security given him, the Watsons might have appropriated or assigned the whole profits without any breach of the agreement. He was entitled only to a commission, or a payment equal in proportion to one-fifth of the profits. Their Lordships acknowledged that this distinction has always been admitted to be thin, but observed that where the law creates a rule of liability and a distinction both equally arbitrary, the distinction which protects from liability is entitled to as much weight as the rule which imposes it. In any event, the necessity of resorting to such fine distinctions has been greatly lessened since Cox v. Hickman, which dissolved the supposed rule of law and made the determination depend on the real intention and contract of the parties rather than on arbitrary presumptions.

The true relation was creditor and debtors. The primary object of the agreement was to give security to the Rajah as a creditor of the firm. The parties did not intend to create a partnership. The Watsons wished to induce the Rajah to continue his advances and were willing to give him the largest security they could offer; a partnership was not contemplated, and the agreement is founded on the assumption not of community of benefit but of opposition of interests. Their Lordships added an important qualification: it may well be that where there is an agreement to share the profits of a trade and no more, a contract of partnership may be inferred, because nothing shows that any other relation was contemplated. That was not this case, where another and different contract — loan and security — was shown to have been intended.

Nor were the Watsons his agents. If there was no partnership, the implied agency which flows from that relation cannot arise, and the relation of principal and agent must be shown on some other ground. It was not expressly created and was not intended. To imply it from the commission on profits and the powers of control would be to create by operation of law a relation opposed to the real agreement and intention of the parties, on exactly the same facts and presumptions that had failed to establish partnership. The Rajah was not in any sense the owner of the business and had no power to deal with it as owner; none of the ordinary attributes of a principal belonged to him. Subject to his powers of control and security, the Watsons remained the owners of the business and of the common property of the firm.

Do not omit these; they are what turn the case from a decision into a rule you can apply.

First, substance prevails over labels. Wherever the agreement between parties creates a relation which is in substance a partnership, no mere words or declarations to the contrary will prevent, as regards third persons, the consequences flowing from the real contract.

Second, a device will not work. If cases occur where persons, under the guise of such an arrangement, are really trading as principals and putting forward as ostensible traders others who are really their agents, they must not hope by such devices to escape liability; the law will look at the body and substance of the arrangement and fasten responsibility on the parties according to their true and real character.

Third, holding out remains available. Where a man holds himself out as a partner, or allows others to do it, the case is wholly different: he is estopped from denying the character he has assumed, on the faith of which creditors may be presumed to have acted. That is s. 28 of the Indian Act.

Participation in the net profits of a trade, even coupled with extensive powers of supervision and control taken as security for advances, does not make the financier a partner where the whole agreement shows that the true relation intended was that of creditor and debtor. The whole agreement must be looked at before any presumption of intention is made; and the control must be tested by asking whether the person had any initiative power and any of the ordinary attributes of an owner or principal.