Mollwo, March & Co. v. The Court of Wards(1872) L.R. 4 P.C. 419

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The Plaintiffs/Appellants, merchants of London, brought an action against the late Rajah
Pertab Chunder Singh, 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 W.N. Watson,
T.O. Watson, and the Rajah, liable as a partner in it. The two Watsons commenced
business in partnership, as merchants at Calcutta, in 1862, under the firm of W.N.
Watson & Co. Their transaction consisted principally in making consignments of goods
to merchants in England, and receiving consignments from them. 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,
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.” on 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. Under the agreement, whilst the advances
made by the Rajah 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. They further agreed to, and in fact did, hand over to the Rajah “as
security” the title deeds of certain tea plantations, and they also agreed, that “as further
security” all their other property including landed or otherwise including their stock in
trade, should be answerable for the debt due to him. This agreement was not signed by
the Rajah, but he was undoubtedly an assenting party to it.
Subsequent 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 properties 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 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 no more,
but much less, than he might have done under it.
SIR MONTAGUE E. SMITH – 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 question in the appeal depend, in the main, on the construction and effect of a written
agreement entered into between the Watsons and the Rajah….The subsequent acts of the Rajah
do not in any way add to or enlarge his liability.
(N)o 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. Watsons & Co. must
depend on his real relation to that firm under the 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 Watsons were the agents of the Rajah in
carrying on the business and the debt to the Plaintiffs was contracted within 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 partnership 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; 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
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 decision 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. The rule had been laid down with
distinctness by Eyre. C.J. in Waugh v. Carver [(1793) 2 W.B. 998] 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 [(1775) 2 W.B. 998] and we think it stands
upon fair grounds of reason.”
The rule was evidently an arbitrary one, and subsequent discussion had 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.”
It was also affirmed and acted on the Pott. v. Eyton. [(184) 3 C.B. 32]. Where C.J. … in
giving the judgment of the Court, adopts the rule as laid down the Lord Eldon and say, “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.”
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 power 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 in Cox. v. Hickman
(1860) 8 HLC 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 former cases were
rightly decided on their own facts; but the judgment in Cox v. Hickman 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. Profits of trade is a strong test of partnership, and that there may be cases where,
from such participation alone, it may as a presumption 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 [(1975) 2 W.B. 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 supports 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.
It was strongly urged that the large powers of control and the provision 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 power 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 doucuments
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 agreements 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 the 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 show that any other was
contemplated; but that is not the present case, where another and different contract is shown to
have been intended, viz. that of loan and security.
It was strongly insisted for the Appellants that if “a true partnership” had not been created
under 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 shown to
exist. It is clear that this relation was not expressely 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
that reasons which have led them to the conclusion that the trade was not agreed to be carried on
for the common benefit of the Wotsons 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 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 remaned owners of 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 if 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 arrangement, 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 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 judgement, and to
dismiss this appeal with costs.