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Full Case Details
LORD MACNAGHTEN – This is an appeal from an order of the Supreme Court of the
Transvaal reversing the judgment of the Witwatersrand High Court at Johannesburg.
The trial of the action took place before Smith J. On all questions of disputed fact and on
all questions of law but one of the learned judges of the Supreme Court agreed with the trial
judge. On one point they differed from him. Founding their opinion on an equity he had
failed to appreciate or discover, they entered judgment for the respondent declaring him
entitled to share with the appellants in the profits of a purchase which they had made secretly
and meant to keep to themselves. Considering the purchased property, though not within the
scope of the partnership adventure, yet connected with it indirectly and thinking the purchase
injurious to the common interest, they held on general principles that the appellants were
liable to account to their partner for any profit derived from the transaction; and they regarded
the veil of secrecy as a damning proof of guilt and aggravation of the wrong of which, in their
view, Goldberg was entitled to complain.
Goldberg was a land speculator. Trimble was an auctioneer: he had been acting chief
detective of the whole of the Transvaal before the war. Bennett was a merchant in Durban in
a good financial position. The partnership agreement between Goldberg, Trimble and Bennett
was dated February 10, 1902. The object of the joint adventure was the purchase and re-sale
of certain properties belonging to a gentleman named Hollard. They consisted of 5500 shares
in a company called the Sigma for building and other real estate in Johannesburg and
elsewhere in South Africa.
There was nothing special in the partnership agreement of February 10, 1902. Profits and
losses were to be shared equally. No partner was to sell or dispose of his interest without the
consent in writing of his partners, All dealings with the property of the partnership were to be
transacted by and through Trimble, to whom the other partners were to give powers of
attorney.
The Sigma Syndicate, whose full title was the Sigma Building Syndicate, Limited, had
been formed in 1896 under the laws of the South African Republic with limited liability. Its
capital was £ 25,000/- divided into 25,000 shares of 1 £ each all fully paid up. The Board of
Directors was to consist of at least four and at most six members of the company. The
management of the company’s affairs was committed to the board “with the most extended
powers and without limit or reserve”. The powers of the board specially enumerated included
“any purchase, sale, or exchange of immovable properties”.
The syndicate was formed for the purpose of making profit by purchasing and re-selling a
number of stands on Marshall Square and Government Square in Johannesburg.
In the early part of 1902 Hollard, a wealthy man and a director of the Sigma Syndicate,
was about to leave South Africa and anxious to dispose of everything he had there before
quitting the country. He put all his properties on the market for sale through Goldberg.
Goldberg was furnished with a prospectus or proposal containing a schedule of the various
lots shewing the aggregate price of the lots and the value placed on each. The total was £
94,566/-. The Sigma shares were put at £ 30,000/-. The prospectus was accompanied by an
elaborate report prepared by a Mr. Dumat, an attorney in Johannesburg. Goldberg’s original
intention seems to have been to form a syndicate for the purpose of purchasing the property,
charging the syndicate 9500/- as commission for his services. The gentlemen who were to
compose the syndicate wanted further time. After carefully considering Dumat’s report and
expressing no little disappointment and dissatisfaction with it, Goldberg advised Hollard not
to grant an extension of time to the syndicate, and proposed to accept Hollard’s offer and buy
on his own account. Bennett and Trimble joined him in the adventure. The one would not
come in without the other, and so the syndicate disappeared, and the partnership agreement of
February 10, 1902, was arranged. To meet Hollard’s requirements a remittance of £ 12,500/-
was telegraphed in advance and Trimble was dispatched to Johannesburg to complete the
business.
Armed with powers of attorney from his two partners, Trimble went to Johannesburg, saw
Hollard there, and settled the terms of the purchase offhand. The purchase deed was executed
by Hollard and by Trimble on behalf of himself and his partners on February 14, 1902. The
purchase price as proposed was £ 94,566/- The sum of £ 12,500/-, which had been sent
forward, was taken as part payment; the balance was secured by mortgage bonds over the
several properties comprised in the purchase.
After this matter was settled, Trimble went one day with Hollard to see the stands
belonging to the Sigma Syndicate. When they came to Government Square Trimble asked
Hollard if the syndicate would sell the stands there en bloc. Hollard said “Yes”, adding that he
thought the board would sell for £120,000/- Trimble asked about conditions, and Hollard
referred him to Davis, the secretary, who would, he said, lay the matter before the board. It
seems that the syndicate had tried without much success to sell their stands. They had put
them up for sale by auction, but had only managed to sell one stand on Marshall Square. The
board, holding as they did 23,000 shares out of 25,000, decided in the presence of all the
shareholders to take 100,000/- for their stands on Government Square, and negotiations were
going on with the Government or the private secretary to his Excellency on that footing.
Trimble, of course, was not made aware of this fact, and after some negotiation with Davis he
was content to take an option to buy for £110,000/- Trimble at once communicated with
Bennett, and told him that he thought from some secret information he had gained, which it
seems would not bear the light, that money was to be made out of the deal. He asked Bennett
to join with him in the speculation, intimating that he was prepared to give even a larger price.
Bennett consented to join, and agreed to finance the enterprise. The directors of the syndicate
were only too glad to accept Trimble’s offer, and thus he secured the stands on Government
Square for himself and Bennett at the price of £110,000/-.
Goldberg was not told anything about this purchase at the time. He did not hear of it until
the end of 1902 or some time in 1903. Meeting Trimble one day in the street, he said,
according to Trimble’s uncontradicted evidence, corroborated by an accountant called
Winship, who was present, “Don’t you think you might have let me have a show in”? Later
on, however, he took a more exalted view of his rights, and in June, 1904, he brought this
action, alleging, in the first place, that the partnership had given Trimble a mandate to buy the
stands on joint account – an allegation which both Courts held not proved. He also contended
that, on general principles applicable to all cases of partnership, he was entitled to share with
his partners in the benefit of their purchase. On this ground the Court of Appeal gave effect
to his claim.
It seems to their Lordships that judgment of the Court of Appeal is not well founded. The
purchase was not within the scope of the partnership. The subject of the purchase was not
part of the business of the partnership, or an undertaking in rivalry with the partnership, or
indeed connected with it in any proper sense. Nor was the information on which it seems
Trimble acted acquitted by reason of his connection with the Sigma Syndicate. The way in
which the information was acquired may have been much to Trimble’s discredit, as the Court
of Appeal has pointed out; but Goldberg is not in a position to complain of that. He at least is
not averse to sharing the profit to which it seems to have conducted.
Now if the purchase from Hollard had been completed so far as to make the partnership
the absolute and unincumbered owner of the 5500 shares in the Sigma Syndicate, and if those
shares had been divided between the three partners and registered in their separate names any
one of the three would have had as good a right to buy any property of the syndicate which
the direction might think fit to offer for sale as any other shareholder in the syndicate or any
member of the general public.
The Court of Appeal appears to have regarded the purchase in question, though not
expressly prohibited by the partnership articles, as a breach of good faith and consequently as
a violation of the fundamental condition of the partnership. Suppose it had been forbidden in
express terms, what would have been the result? The other partners or partners discovering
the breach of contract might have claimed immediate dissolution, or even damages, on proof
of actual loss to the partnership. But a claim to share in the profits of the forbidden purchase
would not have been warranted by principle or precedent. And here there was no loss to the
partnership; only a disappointment to the partner left out in the cold. The purchase apparently
was an advantage to the partnership. Through it the directors of the Sigma Syndicate were
enabled to obtain for their property £10,000/- more than they would have obtained if they had
sold to the Government at their own price. And the partnership, as a shareholder in the
syndicate, was proportionately the gainer.
The Court of Appeal seems to have been much impressed by the secrecy of the
transaction. No doubt it would have been better if Goldberg had been told at the time that
Trimble and Bennett were making this purchase. In a case in the House of Lords, which will
be mentioned presently, in which the circumstances were somewhat analogous, Lord
Blackburn observed, “I generally think it is advisable as a matter of prudence, as well as on
other grounds, to let everything be above board” That is a very proper sentiment, worthy,
perhaps of a more unhesitating acceptance. But still there was no legal obligation on Trimble
or Bennett to tell Goldberg what they were doing unless he had a right to take part in the
speculation if he chose to do so. Their excuse for silence, if it be an excuse, was that they
considered Goldberg an undesirable partner and not financially strong.
The learned judges of the Court of Appeal also seem to lay some stress on a provision in
the articles of association of the Sigma Syndicate which states that “Each share gives,
according to the issued shares, a right to a proportionate share in the ownership of the
company’s assets and in the distribution of profits”. But there is nothing special in that
provision. It is no more than an accurate description of the position of every shareholder in
every trading company limited by shares.
Then there was an argument which it is very difficult to follow. It was said that the
moment Trimble determined to buy these stands, he put himself in a position in which his
interest and his duty conflicted. It was his interest to buy as cheaply as he could. It was his
duty to sell the Sigma shares as dearly as possible. The value of the shares depended on the
value of the stands, and so it was his duty to enhance the value of the stands by every
legitimate means in his power. He ought not to have thought of buying them for less than the
utmost price he felt he might have been forced or tempted to give. He knew he was buying
cheaply, he told Bennett so. The fallacy of this line of argument lies in assuming that Trimble
had anything to do with selling the stands, or any right to meddle with the conduct of the sale.
That was in the hands of the directors. They were dealing at arm’s length with him. It seems
extravagant to suppose that he would have advanced the interests of the partnership by
retiring from the field and declining to enter into a competition which actually had the effect
into a competition which actually had the effect of raising the price of the stands and so
improving the value of the Sigma shares.
In Cassels v. Stewart, which was an appeal from two concurrent judgments in Scotland,
three gentlemen, Reid, Cassels and Stewart, were partners in an undertaking called the
Glasgow Iron Company. The contract of co-partnership contained an article forbidding any
partner to assign his interest, or give any person or persons a right to interfere with the
business, and declaring further that any such assignation should be of no effect as regards the
company. There was also a clause declaring that on the retirement of a partner, the remaining
partners should have power to buy his interest at the amount standing to his credit at the last
balance. Reid sold all his interest to Stewart. Reid’s name, however, remained on the books,
and he signed all deeds relating to the business until his death, which occurred seven years
after the sale. Cassels was not till then informed of the arrangement. When he found it out he
claimed to participate in the purchase on the ground–(1) that a mandate had been given to
Stewart to buy Reid’s interest for the partnership; (2) that under the terms of the partnership
agreement the purchase could only be legally made with his consent; and (3) that Stewart had
secretly acquired a benefit for himself within the scope of the partnership business. It was
held that the alleged mandate was not proved. But it was argued by Sir F. Herschell, the
Solicitor-General, and the Lord Advocate that, putting aside the alleged mandate, “the
agreement was entered into under such circumstances as entitled the appellant to participate in
it”, “the acquisition of the shares of outgoing partners…was one of the objects of the
company”. “Apart from the express terms of the contract the secret agreement by which the
respondent acquired for himself alone a benefit falling within the scope of the partnership
business was a breach of the good faith of the partnership, and when such a benefit was
acquired each partner had a right to demand that it should be communicated to each of them
equally”–“on general principles it was inequitable, having regard to the fiduciary relations
due to each other, that such an agreement should be made behind the back of another partner”.
Without calling on to the respondent, the House, consisting of Lord Selborne L.C. and Lords
Penzance, Blackburn and Watson dismissed the appeal.
It seems to their Lordships that the decision of the Supreme Court of the Transvaal in the
present case cannot stand with the decision in Cassels v. Stewart. There was at least as close
a connection between the partnership and the partner’s purchase in that case as there is in this.
In their Lordships’ opinion the order under appeal cannot be supported on authority or on any
recognized doctrine of equity. Their Lordships will therefore humbly advise His Majesty that
the appeal should be allowed, the order of Smith J. restored, and the appeal from that order
dismissed with costs.
