Story Case

Andrew Coleman and Rufus Morton were partners in the manufacture of cotton goods, transacting business as Coleman & Morton Company. Without the consent of Coleman, who was absent from the business, Morton borrowed the sum of $4,000 from William Shivery, for the purpose of buying a large quantity of cotton, the price of which Morton believed, was about to materially increase. The loan from Shivery was made at two per cent above the usual rate of interest. Four months later, Coleman returned and then as a member of the firm, repudiated the deal with Shivery. The principal sum plus the usual rate of interest was paid to Shively, but not the other two per cent interest, and for this Shively brought suit. Can he recover?

Ruling Court Case. Rothwell Vs. Humphreys, Volume 1 English Reports, Page 406

Humphreys and Howell were partners engaged in the business of linen drapers in London. The plaintiff was a manufacturer in Manchester. Howell, one of the partners, went down to Manchester to buy goods of the plaintiff. He made a purchase of material to the amount of five hundred pounds. Before leaving, he borrowed ten pounds and drew a bill on the partnership in favor of the plaintiff for five hundred and ten pounds. Before the goods were delivered, the partnership, composed of the defendants, became insolvent. The plaintiff recalled and refused to deliver the goods. He did not present the bill for payment, but brought this action to recover the ten pounds which had been included in the bill.

Decision

This loan was binding upon the partnership. It was shown to have been made upon the credit of the firm, and not to the partner personally. The plaintiff had the right to assume, under the circumstances, that Howell, while travelling for and representing the firm, had implied power to borrow money on the firm's credit.

Ruling Law. Story Case Answer

The power of a partner to borrow money on the firm credit rests upon substantially the same principles which govern his power to execute negotiable paper in the name of his firm. In case of a trading partnership, it is generally held that a partner may borrow money on the credit of the firm, when it is for partnership purposes, and done while acting for the partnership. If a partner borrows money from a third person, and the third person reasonably believes it is for the partnership, such loan will be binding upon the firm. Of course, if the third person is aware that it is not for the firm purposes, he can hold the partner alone. In case of a non-trading firm, he can hold the partner alone. In case of a non-trading firm, the usual rule is that one partner has no implied power to pledge the credit of his firm for a loan made to him. Since Coleman & Morton, in the Story Case, was not a trading firm, but a manufacturing partnership, Morton had no right to bind the firm on the loan without the consent of Coleman. As against the firm, Shively could not recover the two per cent interest.