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1872 0 Supreme(SC) 20
1872 Supp LawReportsInd.App. 86
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
(PRESENT:—SIR JAMES W. COLVILE, SIR BARNES PEACOCK, SIR
MONTAGUE E. SMITH, AND SIR ROBERT P. COLLIER.
MOLLWO, MARCH, & CO. - Appellant
Versus
THE COURT OF WARDS - Respondents
On Appeal from the High Court at Fort William, In Bengal.(See L.R. 4 P. C.
419)
Decided On : July 4, 5, 6. 1872

Advocates: Solicitors for the Appellants: Hillyer, Fenwick, & Stibbard. Solicitor for the
Respondent: J. H. Wrentmore.

Judgement
This was an appeal from a judgment of the High Court at Fort William, in Bengal, in
favour of the Respondents, reversing the decree of the Principal Sudder Ameen of the
24 Pergunnahs made in favour of the Appellants.

The suit was brought by the Appellants, who were merchants trading in London,
against Rajah Pertab Chunder Sing Bahadoor, as being jointly liable with the other
persons trading as merchants under the style of Watson & Co., in Calcutta, in respect
of the moneys due to the Appellants in certain transactions and dealings hereinafter
mentioned. The Rajah having died after the commencement of the proceedings, the
defence of the suit was con tinued on behalf of his representatives by the Court of
Wards, the Respondents in the appeal.

The Appellants, before the transactions under which the suit arose, had carried on
business as merchants in London, and had had mutual dealings in trade with the firm
of W. N. Watson & Co., of Calcutta. The dealings consisted in the Plaintiffs firm and
the firm of W. N. Watson & Co. mutually consigning goods and merchandize to each
other for sale, and in the firm of W. N. Watson & Co. drawing bills of exchange on the
Appellants against the goods so consigned by them, which were paid by the
Appellants in London, and in paying moneys on each others account in the usual
course of merchants in correspondence with each other.

On the 19th of June, 1865, there was due to the Appellants from the firm of W. N.
Watson & Co. a balance of Rs.2,92,000. 2p. on the account current between the two
firms.

The business transactions between the two firms were con ducted under the
partnership names, but the real question at issue between the parties was, whether
or not the Rajah was jointly liable as a partner with W. N. Watson and T. O. Watson,
who were admitted to have been the partners in the firm of W.

N. Watson & Co., to pay the balance claimed, or any part thereof.

The issues in the suit, as settled by the officiating Judge of the Court of the 24
Pergunnahs, were

First, whether the Plaintiffs had dealings with the firm of W. N. Watson c£ Co., and
what was the balance due to the Plaintiffs on such dealings and transactions from that
firm. Second, whether the Rajah, the then Defendant, was liable to the Plaintiffs as a
partner of the firm of W N. Watson & Co.; and if so, for what time? Third, being held
to be a partner, for what amount was the Defendant liable? whether for the whole, or
only for a portion ?

The Judge thought it more expedient to try the second issue first, and this course was
accordingly pursued.

On the 30th of November, 1866, Mr. Beaufort, the Judge of the Court of the 24
Pergunnahs, by his judgment on this issue, found that the Rajah was a partner of the
firm of Watson & Co., and that his liability commenced on the 27th of August, 1863,
and ceased on the 3rd of March, 1865. The other issues were sub sequently tried, and
by his judgment, dated the 10th of September, 1868, he found that the Appellants
were entitled to recover in respect of all the items in the account current except two,
which he disallowed for reasons stated in his judgment.

From this judgment an appeal was brought to the High Court of Judicature of Bengal,
and a Division Bench, consisting of the Justices Jackson and Markby, reversed the
judgment of the Court of the 24 Pergunnahs, holding that the Rajah was not liable as
a partner, or otherwise, to the Appellants for the balance or any part thereof; and
from this judgment the present appeal was brought.

The circumstances under which the Appellants contended that the Rajah was liable
were as follows—

T. 0. Watson and his son, W. N. Watson, commenced trading in partnership in

February, 1862, under the style of W. N. Watson & Co. They had but little capital, and
finding themselves in want of money, applied to the Rajah to assist them. He assisted
them during the year 1862 by acceptances, which the Watsons did not meet or
provide for; the Rajah took them up, and was induced to advance further large sums
of money. In January, 1863, he retired an acceptance of Rs. 10,000, and others in the
following March to the extent of Rs. 50,000. In April in that year he advanced Rs.
10,000 to the firm, and in the following August Rs. 20,000. The business was, in fact,
carried on mainly by the Rajahs capital.

On the 27th of August, 1863, an agreement, in the following terms, was made
between the Watsons and the Rajah, although not signed by the Rajah "
Memorandum of agreement made between Rajah Pertab Chunder Singh Bahadoor, of
Pykeparrah, in the suburbs of Calcutta, of the one part, and Messrs. W. N. Watson &
Co., of Calcutta, merchants, of the other part.

"In consideration of certain sums of money already advanced, and which may
hereafter be advanced by the Rajah to Messrs. W. N. Watson & Co., and in
consideration of his signing acceptances and other securities for the said W. N.
Watson & Co., it is hereby agreed as follows—

"1st. Henceforth the said W. N. Watson & Co. shall not make any shipment without
first obtaining the consent of Rajah Pertab Chunder Sing, so long as the said firm shall
remain in debt to the Rajah, and so long as the liabilities incurred by him in signing
acceptances for the firm, or any portion thereof, shall be in existence.

"2nd. Upon such shipments being made, the shipping documents shall be considered
at the disposal of the said Rajah Pertab Chunder Sing, and that the said firm shall not
without his consent sell, pledge, or hypothecate them to any person or bank, nor shall
the firm apply the proceeds thereof in payment of goods shipped without such
consent.

"3rd. Remittances from home in the shape of goods will not be ordered by the firm
without the consent of the Rajah.
"4th. No consignment of goods shall be ordered from home by the firm without the
consent of the Rajah in writing.

“5th. All remittances received by the firm from home, either in money, goods, or
otherwise, shall be made over to the Rajah, and the same shall be under his control.
The firm shall sell the goods with the sanction of the Rajah first obtained, and all the
proceeds shall, after meeting any debts of the firm to other persons which the Rajah
may deem urgent, be retained by the Rajah to extinguish in part or in whole the firms
debt to him, or extinguish wholly or in part the liabilities which he has so incurred as
aforesaid; if the remittance be in consignment of the goods, all documents belonging
to the same shall be handed over duly indorsed by the firm to theRajah, and the same
shall be wholly at his disposal for the purpose of extinguishing the said debt and
liability, subject only to the limitations just above mentioned.

“6th. The proceeds of the sale of any goods consigned free to the firm shall also be
made over to the Rajah, and the proceeds shall be remitted to the consignors with the
sanction of the Rajah.

"7th. With regard to the conducting of the office business of the firm in detail, the
Rajah is to be consulted, and he may direct a reduction or enlargement of the
establishment according as he may deem proper.

"8th. No moneys shall be drawn from the firm for the private expenses of any
member thereof, or for the conducting of business of the firm, except such sums as
the said Rajah shall agree to.

"9th. The Rajah shall have free access to all books, bills, documents, letters, advices,
correspondences, and other papers belonging to the firm or relating to its business.

"10th. In consideration of the said advances made, and the liability incurred as
aforesaid by the Rajah, and in consideration of any future advances which may be
made by him, the firm agrees that be shall receive from them a commission of 20 per
cent, on all net profits made by the firm from time to time, commencing from the 1st
of May, 1862, or until such time as the whole amount of the debt due to him shall be
paid off, and the liability so incurred by him as aforesaid shall be wholly ex tinguished.

"11th. As security to the said Rajah for the advances he has made, or which he may
hereafter make, and the liability which he has incurred in signing acceptances for the
benefit of the said firm, the firm hereby makes over to him the title deeds of their tea
plantations at Cachar called Jeffer Coon Baljore Kishnapore, East Bodreepaul, Central
Buddreeparr, and West Buddreeparr, and the firm hereby agrees not to alienate the
said plantations until the debts due by them to the Rajah are paid oft and his said
liabilities extinguished, when the said Rajah is to return the said title deeds to the
firm.

"12th. As further security to the Rajah, the firm agree that their other property,
landed or otherwise, including their present and future stock-in-trade and
outstandings, shall be answerable for the debts due to him, and the liability incurred
by him as aforesaid.

"13th. The firm shall in addition to the said commission pay to the Rajah interest at
the rate of 12 per cent, per annum upon all cash advances which have been or are to
be hereafter made by him to the firm, and shall also pay to the banks all discount and
interest now as hereafter payable on the said acceptances.

"Dated the 27th day of August, 1863.

"W.N. Watson. "T.O. Watson."

Under the 10th clause of this agreement the sum of Rs. 27,458 10a. 4Ap. was on the
30th of September, 1863, written over to the credit of the Rajah in the books of the
firm in a separate account opened in his name, and called " Private Ledger for amount
of his gain at 20 per cent, on net profit up to 30th April, 1863, as per Journal, Rs.
27,458 14a. 4½ p."

After the date of this agreement, the Rajah advanced further sums of money. He did
not avail himself very largely of the powers conferred upon him by the agreement,
and he stated him-self, that he did not understand much about commercial
transactions; but there was evidence that he recommended clerks for employment by
the firm; that he took part in dismissing a clerk; that he came to the office frequently,
using the room set apart for the members of the firm, and also the room used by the
partners 1 to which persons dealing or having business with the firm had access; that
the accounts were offered for his inspection; that he inspected samples of cotton;
that the communications from England were read to him; that he consulted with the
Watsons on the business and that he was present when business was transacted, and
took part in it.

It appeared that the Watsons held out the Rajah to be a partner to the Plaintiffs and
others. It also appeared that the Rajah, subsequently to the entry to his credit of the
above sum of Rs. 27,458 14a. 4 ½ p., drew against the sum; but it appeared further,
that afterwards, in March or April, 1864, this sum was written over to his debit in the
books of the firm.
In the years 1864 and in 1865, the firm of the Watsons fell into great difficulties and
were, in fact, insolvent. In March, 1865, the Rajah executed a deed wherein, inter alia,
the agreement of the 27th of August, 1863, was recited, and whereby he released and
relinquished all claim under the agreement of the 27th of August, 1863, to " the said
commission or profits," and all claims to any other moneys, except a sum which was
stated in the deed, and which was, by an indenture of even date, secured by a
mortgage of the tea plantations at Cachar, under the agreement of the 27th of
August, 1863.

Shortly after this the Watsons became bankrupts.

The Appellants appealed from the final judgment of the High Court, contending, on
the facts and evidence, that the judgment of the Court of the 24 Pergunnahs was
right, and that the judgment pronounced by the High Court of Judicature was wrong.

The Solicitor-General (Sir G. Jessel Q.C.), Lindley, Q.C., and F. M. White, for the
Appellant—

This is a question of partnership, which must be decided by the true construction of

the deed of agreement between the late Rajah Pertab Chunder Sing and the Messrs.
Watson, of the 27th of August, 1863. The relative position of the parties before that
agreement might be, and probably was, only that of debtor and creditor. It appears
from the evidence, that the Rajah had advanced, from time to time, very large sums
to the Watsons’ firm to enable them to carry on their business, but there was no
written agreement between the parties and no partnership is alleged to have existed
prior to the agreement of the 27th of August, 1863. By that agreement, in
consideration of the sums already advanced, and to be advanced, by the Rajah, the
Messrs. Watson bound themselves to make no shipments without the consent of the
Rajah, to hold the shipping documents, and the proceeds of the shipments, at the
disposal of the Rajah, not to obtain remittances from home in the shape of goods
without his consent, or consignments of goods from home, and to make over to the
Rajah, or hold under his control, all remittances received from home, whether in
money or goods. Such remittances and their proceeds were to be held wholly at the
disposal of the Rajah for the purpose of extin guishing the debt due by the Watsons to
him; and even the pro ceeds of the sale of goods consigned free to the firm were not
to be remitted to the consignees without the consent of the Rajah. The Watsons,
moreover, bound themselves to consult the Rajah in all the details of the business, to
regulate their establishment by his directions, to draw no money from the firm for any
purpose without his consent, and to allow him free access to all the books and papers
of the firm. The Messrs. Watson further agreed, that the Rajah should, in
consideration of the. advances made, liability incurred, and future advances which
might be made, receive a commission of 20 per cent, on all net profits made by the
firm, from time to time, commencing from the 1st of May, 1862, until such time as the
whole of the debts due to him should be paid off and the liability already incurred by
him should be wholly extinguished ; and the Watsons agreed not to alienate certain
plantations owned by them, the title deeds of which they made over to the Rajah as
security, and gave him a lien on all their property, with a covenant to pay him 12 per
cent, interest on all sums advanced. Now, it is in evidence, that the sum of Rs. 27,458
was, under this agreement, written over on the 30th of September, 1863, to the credit
of the Rajah in the books of the firm, as his commission on the net profits up to the
end of April in that year. After the date of this agreement he advanced further sums of
money to the firm; and though it does not appear that he availed himself very largely
of the powers conferred on him by the agreement, yet he attended at the house of
business from time to time, and interested himself generally in the concern,
consulting with his partners, the Watsons, and, if present, taking part in the business
of the firm. It is also in evidence that the Watsons considered and treated him as their
partner, and he is not proved to have done anything himself to disown or disprove
that connection. Now, all these circumstances, coupled with the conditions and
interests contained in the agreement, constituted, as we maintain, and as was held by
the Judge of the 24 Pergunnahs, a valid and subsisting partnership, and rendered the
Rajah liable as a partner from the date of the agreement, or, at least, as regards third
parties to be treated as the Watsons9 partner. The Act to amend the law of
partnership (28 & 29 Vict. c. 86) did, of course, not exist at the time of these
transactions, nor if it had existed would it have applied to India, but is shews, when it
declares by the 1st section, that a lender is not to be considered a partner, by
advancing money for a share of pro fits, what the law was anterior to that enactment,
and we contend, it is now, as regards the circumstances of this case Act, No. XV. of
1866. The case of Cox v. Hickman (8 H. L. C. 268.), which was relied on in the High
Court, and will, no doubt, be relied on by the Respondent here, is distinguishable, and
not in point. There some of the creditors were distinguishable, and not in point. There
some of the creditors were to carry on the business as trustees under the control and
for the benefit of the others; and it was held that the creditors were not partners
under the deed. So where there is no control or right to interfere, as in the case of the
executors of a deceased partner, such executors are no partners Holme v. Hammond
(Law Rep. 7 Ex. 218.); or of inspectors carrying on the trade of the firm under deed
without share of profits or control of the business Redpath v. Wigg (Law Rep. 1 Ex.
335.); Easterbrook v. Barker (Law Rep. 6 C. P. 1.). In Kilshaw v. Jukes (3 B. & S. 847; 22
L. J. (Q.B.) 217.), where the agreement was that a party was merely to be repaid a
debt out of the profits, if any, of the business,, the surplus to belong to other parties,
there was considerable difference of opinion among the Judges as to the effect of the
decision in Cox v. Hickman (8 H. L. C. 268.). An agreement for a man to have a share in
the profits of the business till a debt is paid makes him a partner Bond v. Pittard (3 M.
& W. 357.) ; Barry v. Nesham (3 C. B. 641.) ; Bloxam v. Pell (Cited in Grace v. Smith, 2
W. Bl. 999.). Any specific partici pation in the profits creates a partnership Ex parte
Hamper (17 Ves. 403.) ; In re The English and Irish Church Ins. Soc. (1 Hem. & Mil. 85.)
; Shaw v. Galt(16Ir. C. L. Rep. 357.) ; Bullen v. Sharp (Law Rep. 1 C. P. 86.) ; Wafers v.
Taylor (Tudors L. C. on Mer. & Mar. Law [2nd Ed.], 347.) ; Ex parte Langdale (18 Ves.
300.). We maintain, therefore, that the Rajah was a partner in the firm of Watson &
Co., and was therefore bound by the acts of his co-partners in the usual course of
business; and that, whether he was partner or not, the Watsons, as his agents, were
authorized to pledge his credit; that he became jointly liable with them to the
Appellants, and that the judgment of the Judge of the Court of the 24 Pergunnahs was
right and ought to be sustained.

Sir R. Palmer, Q.C., H. James, Q.C., and Doyne, for the Respondent—

There are no grounds for fixing the Rajah with liability as a partner for the debts of the
firm of Watson & Co., or any part of them. The agreement of the 27th of August,
1863, was entered into by Watson & Co., as debtors, with the Rajah, as their creditor,
and in no other character; and its stipulations constitute only the terms of an
arrangement between the Rajah, as such creditor, and the firm as his debtors, as to
the means by which payment of his debt should be provided for and secured. The
provision for pay ment to the Rajah of a commission of 20 per cent., upon the net
profits made or to be made by the firm before the debt should be fully discharged,
was not a contract for his participation in the profits of the business, nor a contract
authorizing Watson & Co. to carry on the business for the joint benefit, or on the joint
account, of the Rajah and themselves, but was, in effect, nothing more than a
stipulation for an addition contingent upon, and proportionate to, any profits which
might be realized by Watson & Co. to the ordinary rate of interest upon the Rajahs
debt, such being a lawful stipulation as between debtors and creditor, and in no wise
operating to make the creditor a partner in the debtors business. This is the true and
legal effect of the agreement between the r parties, and it is preposterous to seek, as
the Appellants have done, to make the Rajah liable under it for the entire claims of
the Appellants upon Watson & Co. for private and partnership debts from the
commencement of their mutual dealings to the end of the year 1864. The law
applicable to the case has been entirely misconceived by the Judge of the Court of the
24 Pergunnahs, but has been rightly applied by the High Court. The case must be
governed by the decision of the House of Lords in Cox v. Hickman (8 H. L. C. 268.),
there Smith & Co., trading in that name, becoming embarrassed, executed a deed, to
which they were parties of the first part; certain of the creditors, as trustees, of the
second part; and the general scheduled creditors (among whom the trustees were
named), of the third part. The deed assigned the property of S. & S. to the trustees,
and empowered them to carry on the business under the name of the " Stanton Iron
Company,” to execute all contracts and instruments necessary to carry it on, to divide
the net income to be taken among the creditors in rateable proportions (such income
to be deemed the property of S. & S.), with power to the majority of the creditors,
assembled at a meeting, to make rules for conducting the business or to put an end to
it altogether; and after the debts had been discharged, the property was to be re-
transferred by the trustees to S. & S. Two of the creditors, C. and W., were named
among the trustees. C. never acted.

W. acted for six weeks and then resigned. Some time afterwards the other trustees,
who continued to carry on the business, became indebted to H., and gave him bills of
exchange accepted by themselves "Per proc. the Stanton Iron Company." It was held,
that there was no partnership created by the deed, and that consequently C. and W.
could not be sued on the bills as partners in the company. Now, the effect of this
decision was to overrule the conclusion that had before prevailed, that because a man
was interested in the profits of a partnership, therefore, he was a partner, and to hold
that participation in the profits did not of itself constitute a partnership; that it was
indeed right, in deciding, whether or no a man was a partner, to consider, whether or
no he was interested in the profits; and their Lordships evidently attributed very great
weight to that circumstance. But they emphatically put the question upon a wider
ground; and the question now is, not did the person sought to be made liable
participate in the profits, but has the trade been carried on by persons acting on his
behalf? The case of Cox v. Hickman (8 H. L. C. 268.) has been followed and adopted in
principle by the Exchequer Chamber in the case of Bullen v. Sharp(Law Rep. 1 C. P.
109.), from the Common Pleas, where a memorandum of agreement giving a
contingent interest in the net average profits of the business of an underwriter, was
held not to constitute a partnership. That case overruled the dictum in Grace v.
Smith(2 W. Bl. 998.), and the judgment in Waugh v. Carver (2 H. Bl. 235.), and upheld
the decision of the House of Lords in Cox v. Hickman (8 H. L. C. 268.), which must now
be taken to be the only authority on the subject Stocker v. Brocket-bank (3 Mac. & G.
263.), Tudors L.C. on Mer. & Mar. Law, 343. Story on Partnership, ch. iv., sect. 49 [6th
Ed.] ; Lindley on Partnership [2nd Ed.],

pp. 38-9.
The consideration of their Lordships judgment having been reserved was now
delivered by

SIR MONTAGUE E. SMITH—

The action which gives occasion to this appeal was brought by the Plaintiffs (the
Appellants), merchants of London, against the late Rajah Pertab Chunder Sing, to
recover a balance of nearly three lacs of rupees claimed to be due to them from the
firm of W. N. Watson & Co., of Calcutta.

The Rajah having died during the pendency of the suit, the defence was continued by
the Respondent, the Court of Wards, on behalf of his minor heir.

The plaint alleged that the firm of W. N. Watson & Co. consisted of William Noel
Watson, Thomas Ogilvie Watson, and the Rajah, and sought to make the Rajah liable
as a partner in it.

It may be assumed, although the exact amount is a question in dispute in the appeal,
that a large balance became due from the firm to the Plaintiffs during the time when
it is contended that the Rajah was in partnership with the two Watsons.

The questions in the appeal depend, in the main, on the construction and effect of a
written agreement entered into between the Watsons and the Rajah; but it will be
necessary to advert to some extrinsic facts to explain the circumstances under which
it was made and acted on.

The two Watsons commenced business in partnership, as merchants at Calcutta, in

1862, under the firm of W. N. Watson & Co. Their transactions consisted principally in
making consignments of goods to merchants in England, and receiving consignments
from them.

In January, 1863, they entered into an agreement with the Plaintiffs regulating the
terms on which consignments were to be made between them, and under which W.
N. Watson & Co. were authorized, within certain limits, to draw on the Plaintiffs in
London against consignments.

The Watsons had little or no capital. The Rajah supported them, and in 1862 and 1863
he made large advances to enable them to carry on their business, partly in cash, but
chiefly by accepting bills, for which the Watsons obtained discount, and which the
Rajah met at maturity. In the middle of 1863 the total amount of these advances was
considerable, and the Rajah desired to have security for his debt, and for any future
advances he might make, and also wished to obtain some control over the business by
which he might check what he considered to be the excessive trading of the Watsons.

Accordingly, an agreement was entered into on the 27th of August, 1863, between
the Rajah of the one part, and " Messrs. W. N. Watson & Co." of the other part, by
which, in consideration of money already advanced, and which might be thereafter
advanced by the Rajah to them, the Watsons agreed to carry on their business subject
to the control of the Rajah in several important particulars, which will be hereafter
adverted to. They further agreed to and in fact did, hand over to him "as security" the
title deeds of certain tea plantations, and they also agreed, that "as further security"
all their other property, landed or otherwise, including their stock in trade, should be
answerable for the debt due to him.

The 10th and 13th clauses of the agreement were as follows — [His Lordship read
these clauses, ante, pp. 90, 91.]

This agreement is not signed by the Rajah, but he was undoubtedly an assenting party
to it.

Subsequently to the agreement, the Rajah made further advances, and the amount
due to him ultimately exceeded three lacs of rupees.

In 1864 and 1865, the firm of W. N. Watson & Co. fell into difficulties. An arrangement
was then made, under which the Rajah, upon the Watsons executing to him a formal
mortgage of the tea plantations, to secure the amount of his advances, released to
them, by a deed bearing date the 3rd of March, 1865, all right to commission and
interest under the agreement of August, 1863, and all other claims against them.

In point of fact, the Rajah up to this time had never received possession of any of the
property or moneys of the firm, nor any of the proceeds of the business, and did not
in fact receive any commission. A sum of Rs. 27,000 on this account was, indeed, on
the 30th of September, 1863, placed to his credit in the books of the firm in a
separate account opened in his name, but the sum so credited was never paid to him,
and was subsequently "written back" by the Watsons.

Some evidence was given as to the extent of the interference of the Rajah in the
control of the business. It seems the Rajah knew little of its details, and it is
unnecessary to go, with any minuteness, into the facts on this part of the case; for it
was conceded that the Rajah availed himself only in a slight degree of the powers of
control conferred upon him by the agreement in fact, that he did not more, but much
less, than he might have done under it, so that the question really turns on the effect
of the con tract itself so the subsequent acts of the Rajah do not in any way add to or
enlarge; his liability.

Before proceeding to the main questions which have been argued in the appeal, it
may be as well to clear the way for their consideration by saying that no liability can in
this case be fastened upon the Rajah on the ground that he was an ostensible partner,
and, therefore, liable to third persons as if he was a real partner. It is admitted that he
did not so hold himself out and that a statement made by one of the Watsons to the
Plaintiffs, to the effect that he might be in law a partner, by reason of his right to
commission on profits, was not authorized by the Rajah.

The liability, therefore, of the Rajah for the debts contracted by W. N. Watson & Co.
must depend on his real relation to that firm under te agreement.

It was contended, for the Appellants, that he was so liable

First, because he became by the agreement, at least as regards third persons, a

partner with the Watsons; and

Secondly, because, if not "a true partner" (the phrase used by Mr. Lindley in his
argument) the Watsons were the agents of the Rajah in carrying on the business; and
the debt to the Plaintiffs was contracted with the scope of their agency.

The case has been argued in the Courts of India and at their Lordships’ Bar, on the
basis that the law of England relating to partnerships should govern the decision of it.
Their Lordships agree that, in the absence of any law or well-established custom
existing in India on the subject, English law may properly be resorted to in mercantile
affairs for principles and rules to guide the Courts in that country to a right decision.
But whilst this is so, it should be observed that in applying them, the usages of trade
and habits of business of the people of India, so far as they may be peculiar, and differ
from those in England, ought to be borne in mind.

The agreement, on the face of it, is an arrangement between the Rajah, as creditor,
and the firm consisting of the two Watsons, as debtors, by which the Rajah obtained
security for his past advances f 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 20 per cent, on profits, and should be
invested with the powers of supervision and control above referred to. The primary
object was to give security to the Rajah as a creditor of the firm.

It was contended at the Bar, that whatever may have been the intention, a
participation in the net profits of the business was, in contemplation of law, such
cogent evidence of partnership that a presumption arose sufficient to establish, as
regards third parties, that relation, unless rebutted by other circumstances.

It appears to their Lordships that the rule of construction involved in this contention is
too artificial; for it takes one term only of the contract and at once raises a
presumption upon, 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.

It certainly appears to have been at one time understood that some decisions of the
English Courts had established, as a positive rule of law that participation in the net
profits of a business made the participant liable as a partner to third persons. (See
this pointedly stated by Mr. Justice Blackburn, in Bullen v. Sharp (Law Rep. 1 C. P.
109.). The rule had been laid down with distinctness by Eyre, C.J., in Waugh v. Carver
(2 H. Bl. 235.), and the reason of the rule the Chief Justice thus states "Upon the
principle that, by taking a part of the profits, he takes from the creditors a part of that
fund which is the proper security to them for the payment of their debts. That was
the foundation of Grace v. Smith (2

W. Bl. 998.), and we think it stands upon fair grounds of reason."

The rule was evidently an arbitrary one, and subsequent discussion has led to the
rejection of the reason for it as unsound. Whilst it was supposed to prevail, much
hardship arose from its application, and a distinction, equally arbitrary, was
established between a right to participate in profits generally as such, and a right to a
payment by way of salary or commission "in proportion " (to use the words of Lord
Eldon) " to a given quantum of the profits.”

The distinction was stated to be "clearly settled,” and was acted upon by Lord Eldon in
Ex parte Hamper (17 Ves. 412.), and in other cases. It was also affirmed and acted on
in Pott v. Eyton (3 C.

B. 32.), where Tindal, C.J., in giving the judgment of the Court, adopts the rule as laid
down by Lord Eldon, and says, "Nor does it appear to make any difference whether
the money is received by way of interest on money lent, or wages, or salary as agent,
or commission on sales (Ibid. 40.)."

The present case appears to fall within this distinction. The Rajah was not entitled to a
share of the profits "as such;" he had no specific property or interest in them qua
profits, for, subject to the powers given to the Rajah by way of security, the Watsons
might have appropriated or assigned the whole profits without any breach of the
agreement. The Rajah was entitled only to commission, or a payment equal in
proportion to one-fifth of their amount.

This distinction has always been admitted to be thin, but it may be observed that the
supposed rule itself was arbitrary in the sense of being imposed by law and of being
founded on an assumption opposed in many cases to the real relation of the parties;
and when the law thus 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.

But the necessity of resorting to these fine distinctions has been greatly lessened
since the presumption itself lost the rigid character it was supposed to possess after
the full exposition of the law on this subject contained in the judgment of the House
of Lords is Cox v. Hickman (8 H. L. C. 268.) and the cases which have followed that
decision. It was contended that these cases did not overrule the previous ones. This
may be so, and it may be that Waugh v. Carver (2 H. Bl. 235.), and others of the
former cases, were rightly decided on their own facts; but the judgment in Cox v.
Hickman (8 H. L.

C. 268.) had certainly the effect of dissolving the rule of law which had been supposed
to exist, and laid down principles of decision by which the determination of cases of
this kind is made to depend, not on arbitrary presumptions of law, but on the real
contracts and relations of the parties. It appears to be now established that although
a right to participate in the profits of trade is a strong test of partnership, and that
there may be cases where, from such perception alone, it may, as a pre sumption, not
of law but of fact, be inferred; yet that whether that relation does or does not exist
must depend on the real intention and contract of the parties.

It is certainly difficult to understand the principle on which a man who is neither a real
nor ostensible partner can be held liable to a creditor of the firm. The reason given in
Grace v. Smith (2 W. Bl. 998.), that by taking part of the profits he takes part of the
fund which is the proper security of the creditors, is now admitted to be unsound and
insufficient to support it; for of course the same consequences might follow in a far
greater degree from the mortgage of the common property of the firm, which
certainly would not of itself make the mortgagee a partner.

Where a man holds himself out as a partner, or allows others to do it, the case is
wholly different. He is then properly estopped from denying the character he has
assumed, and upon the faith of which creditors may be presumed to have acted. A
man so acting may be rightly held liable as a partner by estoppel.
Again, 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.

Numerous definitions by text-writers of what constitutes a partnership are collected

at the end of the introduction to Mr. Lindleys excellent treatise on this subject. Their
Lordships do not think it necessary to refer particularly to any of them or to attempt
to give a general definition to meet all cases. It is sufficient for the present decision to
say, that to constitute a partnership the parties must have agreed to carry on business
and to share profits in some way in common.

It was strongly urged, that the large powers of control, and the provisions for
empowering the Rajah to take possession of the consignments and their proceeds, in
addition to the commission on net profits, amounted to an agreement of this kind,
and that the Rajah was constituted, in fact, the managing partner.

The contract undoubtedly confers on the Rajah large powers of control. Whilst his
advances remained unpaid, the Watsons bound themselves not to make shipments,
or order consignments, or sell goods, without his consent. No money was to be drawn
from the firm without his sanction, and he was to be consulted with regard to the
office business of the firm, and he might direct a reduction or enlargement of the
establishment. It was also agreed that the shipping documents should be at his
disposal, and should not be sold or hypothecated, or the proceeds applied, without
his consent; and that all the proceeds of the business should be handed to him, for
the purpose of extinguishing his debt.

On the other hand, the Rajah had no initiative power; he could not direct what
shipments should be made or consignments ordered, or what should be the course of
trade. 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. No doubt he
might have laid his hands on the proceeds of the business; and not only so, but it was
agreed that all their property, landed and otherwise, should be answerable to him as
security for his debt.

Their Lordships are of opinion, that by these arrangements the parties did not intend
to create a partnership, and that their true relation to each other under the
agreement was that of creditor and debtors. The Watsons evidently wished to induce
the Rajah to continue his advances, and for that purpose were willing to give him the
largest security they could offer; but a partnership was not contemplated, and the
agreement is really founded on the assumption, not of community of benefit, but of
opposition of interests.

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 there is nothing to shew
that any other was contemplated; but that is not the present case, where another and
different contract is shewn to have been intended, viz., one of loan and security.

Some reliance was placed on the statute, 28 & 29 Viet. c. 86, sect. 1, which enacts,
that the advance of money to a firm upon a contract that the lender shall receive a
rate of interest varying with the profits, or a share of the profits, shall not, of itself,
constitute the lender a partner, or render him responsible as such. It was argued, that
this raised an implication that the lender was so responsible by the law existing before
the passing of the Act. The enactment is no doubt entitled to great weight as evidence
of the law, but it is by no means conclusive; and when the existing law is shewn to be
different from that which the Legislature supposed it to be, the implication arising
from the statute cannot operate as a negation of its existence. What may be the effect
of the positive enactment contained in the 5th clause of the Act, so far as regards
England, it is not necessary for their Lordships to consider. The Indian Act, No. XV. of
1866, passed after this contract was made, does not contain that provision.

It was strongly insisted for the Appellants that if "a true partnership9 had not been
created under the agreement, the Watsons were constituted by it the agents of the
Rajah to carry on the business, and that the debt of the Plaintiffs was contracted
within the scope of their agency.

Of course, if there was no partnership, the implied agency which flows from that
relation cannot arise, and the relation of principal and agents must on some other
ground be shewn to exist. It is clear that this relation was not expressly created, and
was not intended to be created by the agreement, and that if it exists it must arise by
implication. It is said that it ought to be implied from the fact of the commission on
profits, and the powers of control given to the Rajah. But this is again an attempt to
create, by operation of law, a relation opposed to the real agreement and intention of
the parties, exactly in the same manner as that of partners was sought to be
established, and on the same facts and presumptions. Their Lordships have already
stated the reasons which have led them to the conclusion that the trade was not
agreed to be carried on for the common benefit of the Watsons and the Rajah so as to
create a partnership; and they think there is no sufficient ground for holding that it
was carried on for the Rajah, as principal, in any other character. He 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 principal belonged to him. The Watsons were to carry on
the business; he could neither direct them to make contracts, nor to deal with
particular customers, nor to trade in the manner which he might desire his powers
were confined to those of control and security, and subject to those powers, the
Watsons remained owners of the business and of the common property of the firm.
The agreement in terms, and, as their Lordships think, in substance, is founded on the
relation of creditor and debtors, and establishes no other.

Their Lordships opinion in this case is founded on their belief that the contract is really
and in substance what it professes to be, viz., one of loan and security between
debtors and their creditor. If cases should occur where any 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; for the law, in cases of this kind, will look at the body and
substance of the arrangements, and fasten responsibility on the parties according to
their true and real character.

For the above reasons their Lordships think that the Judges of the High Court, in
holding that the Rajah was not liable for the debts of the firm of W. N. Watson & Co.,
took a correct view of the case; and they will, therefore, humbly advise Her Majesty to
affirm their judgment, and to dismiss this appeal with costs.