Story Case

George Jackson, owner of a saw mill, and James Simpson, dealer in logs, made the following contract: Jackson promised to give Simpson a chattel mortgage on all lumber which was sawed of logs purchased from Simpson, so long as the lumber lay in the mill yard unsold. When the lumber was sold to parties approved of by Simpson, the latter should receive the actual market price of the logs at the time of their delivery to Jackson, plus ten per cent of the profits from the sale of the lumber. Simpson agreed to furnish all the logs Jackson should want under this arrangement.

While the two parties were working under this contract, Jackson became insolvent, and John Blakely, a saw mill creditor, attempted to hold Simpson for money owed for saws delivered to the mill. Blakely maintained that, since Simpson had some control over the mill because of his right to determine who should not be purchasers of lumber, and also since he had an interest in the profits and in the lumber itself, he should be considered liable as a partner. Simpson contended that he was merely a creditor.

Ruling Court Case. Mollwo, March & Co. Vs. The Court Of Wards, Volume 4 Privy Council, Appeals, Page 419

The W. N. "Watson Company was a partnership doing business in Calcutta, India; its business consisted principally in making consignments. The firm had very little capital, and it borrowed large sums of money from the Rajah of India, with which to carry on its business. In order to give the Rajah security for money then owing to him and money to be advanced in the future, it was agreed that he should have a certain per cent of the profits to be applied towards paying off the indebtedness to him. Later, the partnership's financial affairs became more involved, and 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 the advances, released to them, by a deed, all right to commission and interest under the first agreement, above mentioned.

The partnership eventually became unable to meet its obligations; the Mollwo, March and Company, one of its creditors, instituted this action against the Rajah, claiming that he was a partner, and liable for the debts of the partnership. After a short delay caused by the death of the Rajah, the Court of "Wards continued the defense upon behalf of the Rajah's minor heir.

Decision

No partnership existed between the Rajah and the Watsons; the relation was that of debtor and creditor, the control which was given the Rajah over the property of the partnership by the mortgage, was merely by way of security, and there was never any intention to form a partnership.

The Court said in part: "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, 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. By these arrangements the parties did not intend to create a partnership, and their true relation to each other, under the agreement, was that of creditor and debtor. 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."

Ruling Law. Story Case Answer

What significance is to be attached to the fact that one person has control over the business, or the management of the business, of another? The significance in a given case will depend upon the nature and purpose of the control. If the control is only for the purpose of giving security to one who has advanced money, then it has little significance. Control over a business by a person sought to be charged as a partner, must be of such a character that he may participate in all the affairs of the business, direct it, manage it, with affirmative as well as negative powers. If a given person has control of this nature, that power, taken with other circumstances, is very strong evidence of the intention to create a partnership.

In the Story Case, a partnership did not exist, because Simpson's control was merely negative. He could not select the purchasers, he could merely oppose the choice of any prospective customers. Also, his interest in the lumber was that of a mortgagee, and not of a co-owner; and, finally, the contract could be terminated at any time by Jackson, merely by failing to purchase logs. The only possible element of partnership was that of sharing in the profits and this element alone is not sufficient to make a partnership. The other characteristics clearly indicate a debtor and creditor relationship.