Rhodes v. Moules(1895) 1 Ch. 236 (CA)

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LORD HERSCHELL L.C. – This is one of those painful cases in which whatever
judgment is pronounced the loss must fall upon some innocent person who has not by act or
default contributed to it.
The litigation in this case has arisen out of the frauds of Mr. Rew, who practiced his
profession as a solicitor in partnership with Messrs. Hughes and Masterman and the City of
London. There is no doubt that the certificates of 280 De Beers shares were placed in his
hands by Mr. Rhodes, the Plainytiff, in August, 1891. Those shares he has fraudulently
misappropriated, and the first question is whether his partners, Messrs. Hughes and
Masterman, are liable to make good the loss to the Plaintiff. Before stating the circumstances
under which the shares were received by Rew, it is necessary to revert to some prior
transactions between the Plaintiff and Mr. Rew acting on behalf of the firm. It is clear that
Mr. Rhodes was a client of the firm, and that the firm had acted for him in previous matters.
[His Lordship stated that facts as given above, and then proceeded as follows: –]
Some criticisms were presented to the Court on the evidence of Mr. Rhodes, and the
learned Judge in the Court below has adverted to some inconsistencies in his evidence. I have
read his evidence, and there seem to me to be no inconsistencies in it which are at all material.
I think it cannot be doubted that Mr. Rew had represented to Mr. Rhodes that the lenders
required some security beyond the mortgage of the freehold, that such security was to be
collateral and to consist of these De Beers shares, and that he induced Mr. Rhodes to leave the
De Beers shares with him on the representation that he would arrange with the lenders that he
should hold them as for them collateral security or their loan. Whatever verbal differences
there may be, I think there can be no doubt that this is the substance of the transaction in
view, net merely of Mr. Rhodes’ statements, but of the letters to which I have referred written
previously by Mr. Rew to Mr. Rhodes.
The question is whether under these circumstances the firm are liable in respect of these
shares which have been misappropriated in the manner I have mentioned. It is said that they
are not, inasmuch as it was beyond the scope of Mr. Rew’s authority as a solicitor to take the
shares for any such purpose, or under such circumstances, and that, inasmuch as his partners
were admittedly ignorant of his having so taken them, they cannot be bound by the transaction
or incur any liability in respect of it. It is clear that on previous occasions the firm had acted
for Mr. Rhodes in negotiating loans, and in receiving from him these very securities and
transmitting them to the lenders, and in the first instance certainly receiving them back from
the lenders. That that was a firm transaction I think it is impossible to dispute, because as I
have shewn, it passed through the books of the firm, the firm credited themselves with the
charges in respect of it, and an account was sent in the name of the firm, and that account was
discharged by Mr. Rhodes. Therefore, it is impossible to dispute that Mr. Rhodes had on the
previous occasion actually carried through a transaction with the firm, and as a part of the
transaction they not only negotiated the loan, but received from him these very securities to be

handed to the lender. Even apart from that, I am not satisfied that it would be outside the
scope of a solicitor’s business when they were negotiating a loan for one of their clients to
receive from him securities, whatever their nature, for the purpose of transmission to any of
their clients who were making the loan. It is not necessary to decide that as a matter of law;
all I say it, I am not satisfied. But, in the present case, having regard to the prior dealings of
this gentleman with the firm, I think it is impossible for them to say that Mr. Rhodes was not
perfectly justified in assuming that the partner with whom on this occasion he dealt had
authority from the firm to receive from him the shares which he handed for the purpose of
carrying out the mortgage transaction which they were negotiating for him. If these shares
had been handed over to the lenders the transaction would be on all fours with the one which
had been previously carried through by him on behalf of the firm. In the present case it is true
that the shares were not handed over to the lenders; but Mr. Rew represented to the Plaintiff
that this was by arrangement between him and the lenders, who were also his clients, and who
had arranged that he, or rather that the firm, should hold the securities on behalf of the lenders
instead of handing them over to him. It seems to me that that can make on possible difference
in the result. That was merely a matter between Mr. Rew, or the firm, and their other clients
with whom they had negotiated the loan. If in fact that authority had been received–a
question which I shall have to deal with presently–it seems to me it would be quite immaterial
whether the transaction was carried out in that way or by Mr. Rew receiving them to hand
them over afterwards to his clients, the lenders.
For these reasons, apart from authority, I find it difficult to discover any ground upon
which it could be said that Mr. Rhodes was not justified in treating, and entitled to treat, the
transaction as a transaction with the firm which rendered, not Mr. Rew only, but the firm
responsible, if the shares received under the circumstances I have detailed were
misappropriated and not forthcoming. This, of course, is subject to the question whether the
firm had discharged themselves by shewing that they were held for the Defendants Moules
under such circumstances that those Defendants are liable to the Plaintiff; in which case, of
course, the firm would be discharged from liability, because they would in fact have handed
them over to the lenders, and be freed from responsibility to Mr. Rhodes, the lenders being
then the persons responsible; but that is a subsequent part of the case which I will deal with
presently.
The Defendants relied mainly upon the case of Cleather v. Twisden [28 Ch. D. 340],
decided in this Court in the year 1884. It was said that this case established that it was not
part of the business of a solicitor to take over for custody bonds payable to bearer, and,
consequently, when one partner had done so without his other partners being aware of it, they
were under no liability if he misappropriated them. I do not think that case covers the present
one. In the view which I take, these bonds were not handed to Mr. Rew merely for safe
custody: they were handed to him in connection with a mortgage transaction which he was
carrying out, in order that they should pass through him as collateral security to the lenders
for whom he was acting. But it is to be observed that in the case of Cleather v. Twisden Lord
Justice Bowen said [28 Ch. D. 349]: “The claim is against the firm to which Parker belonged
in respect of the custody of certain bonds by Parker. This is conceded to be beyond the
ordinary scope of the business of solicitors, though, of course, it may be brought within it by

special circumstances”. There was, therefore, there no evidence on the question; but it was
conceded by those who were arguing the case that such a transaction was beyond the ordinary
scope of the solicitors. It cannot be said, therefore, that in that case it was held as a matter of
law to be so, because obviously when that had been conceded as a matter of fact any finding
as a matter of law would have been superfluous. So that I do not think the case can be taken
as a decision in point of law that such a transaction would be beyond the scope of solicitor’s
authority. As the Lord Justice said, it must depend upon the special circumstances; and
certainly if it were to appear that it had been part of the practice of solicitors in the City to
take securities of this description for safe custody, or if indeed in the case of a particular firm
it appeared that such had been the practice, the case would have been one requiring the Court
to determine whether in the case of that firm at all events, if not generally, it was not a matter
within the scope of the authority of one of the partners. I should say the decision in Cleather
v. Twisden appears to me substantially to have amounted only to this, that Parker had really
taken charge of the bonds for a client as a personal matter as between him and that client, as a
solicitor of course, but still not as a member of the firm, but as an individual. That seems to
have been the conclusion at which the Court arrived, and there were undoubtedly
circumstances which point to that conclusion to which it is not necessary to refer further.
Lord Justice Bowen says this [28 Ch. D. 351]: “That the bonds were in the custody of Parker
is common ground, the real question is whether in letters for which the firm are responsible,
language has been used which would justify the plaintiffs in assuming that Parker’s custody
was the custody of the firm”. In the present case I have a difficulty in seeing how it can be
doubted that letters for which the firm were responsible – letters relating to the previous
transaction to which I have alluded, which passed through the letter-book of the firm, charges
made by the firm and paid by the Plaintiff – would justify the Plaintiff in assuming that when
Rew received those shares he received them, not as an individual, but on behalf of the firm,
and that his receipt of them was the receipt of the firm. In Lord Justice Fry’s judgment he
says this [28 Ch. D. 356]: “He” (that is, Parker) “was advising the trustees in the realization
of the property, and I do not doubt that as to any parts such as the mortgages, which were
received by Parker for distribution, the firm would be responsible; but as to the bonds they
were not received for the purpose of distribution but for safe custody long before the
distribution began”. Therefore, I do not see any reason to think that if circumstances such as
we have in the present case had been brought before the Court which decided that case – if
they had been aware of such previous transaction as we are aware of here, and had seen that
the securities were received in connection with a mortgage transaction in the way they were
here – they would have come to any other conclusion than that in which we have arrived.
But then it is said on behalf of the Plaintiff, the Defendants Moules are responsible for
these shares, and the receipt of them by Mr. Rew was a receipt on their behalf. He held them
on their behalf, and whatever the liability of the firm to the Moules they cannot call upon the
Plaintiff to repay the sum lent without not only reconvening to him, but giving up to him
these De Beers shares. In order to establish this case I think they must make out two things:
first, that Mr. Rew did in fact receive an hold these De Beers shares for the Defendants
Moules; and secondly, that he did so with the authority of the Moules. Now, I have not been
satisfied that he did in fact receive them, or ever intended to receive them and hold them for

the Moules. No doubt he led Mr. Rhodes to believe that he did: but that is quite a different
question.
The case is a very peculiar one. Mr. Rew when he drew up the mortgage from Mr.
Rhodes to the Moules made himself a mortgage, not only without any authority to do so, but
without any legitimate reason for doing so. He was, of course, not a mortgagee. He had told
Mr. Rhodes that the mortgagees would require some collateral security and that he thought
they would take the De Beers shares. He had no communication on the subject with the
Moules at all; they never required further security, and he never communicated with them on
the subject. He told Mr. Rhodes that it was by arrangement with them that the shares were to
be left in the custody of the firms. No such arrangement had been made: and again, as I have
said, there was no communication on the subject. We know that Mr. Rew had commenced the
Stock Exchange transactions which ultimately led to his ruin at a date prior to this, viz., in the
January of that year, and he ultimately did dispose of those shares as his own. Under those
circumstances I cannot say, in the absence of any evidence, that he ever identified them as
their property, that he ever put them in an envelope or wrote their name on them or did
anything to earmark them as theirs; and, in view of the falsehoods and irregularities to which I
have referred, I cannot be satisfied that at the time he received those shares he ever meant to
hold them really for the Moules. But even if he did, is there evidence that he had authority to
receive and hold these shares on behalf of the Moules so as to make them liable? It was not
suggested that he received any express authority, that they ever actually heard anything of the
transaction: but it is said that he had a general authority, that the whole of the business in
connection with the estate in which they were interested was left so entirely to Mr. Rew that
he was intended to be by them absolutely master of the situation, taking what he pleased and
doing what he pleased. Now, I have read the correspondence, and it conveys to my mind
precisely the opposite impression. I do not find Mrs. Moules leaving everything to him in that
blind way at all. She requires to know about everything. He professes to tell her about
everything. He asks her approval at every step, and that approval is conveyed, and doubts
were sometimes suggested, and, seeing that neither she nor her son ever learned that these
shares had been taken or held for them by Mr. Rew or the firm, it seems to me it would be
somewhat extravagant to arrive at the conclusion, notwithstanding all that, that they were held
by the firm or Mr. Rew for the Moules, or that, having been in effect handed to them, they had
become responsible for them.
For these reasons I am unable to come to the conclusion that the Defendants the Moules
are liable. I do not think that the firm who undoubtedly received these shares from Mr.
Rhodes have discharged themselves of liability. It follows in the result, I think, that as regards
the Moules, the appeal should be dismissed with cost; and as regards the other Defendants the
judgment must be reversed with the usual result, and that judgment with costs should be for
the Plaintiff.