Partners liable for debts contracted since formation only. CHAPTER XVI. COMMENCEMENT OF THE LIABILITY OF PARTNERS FOR As the liability of partners for company debts and obligations depends upon their being its sureties for such debts and obligations as it has contracted as a quasi person through the instrumentality of one or more of them as its agents, it follows that such liability only commences from the date of its formation. Prior to that event there was no quasi person to contract, no agency by which it could be bound, and no sureties on whose guarantee the public could rely. Hence results the legal principle, that a partner is not liable for any obligations of his copartners, or for any acts they may have done, or any representations they may have made, before the company was formed. In private partnerships it often happens that, before the partnership is formed, those who afterwards become partners agree among themselves that one shall contribute goods and another money when the concern is set agoing. If, in such circumstances, the goods are furnished or the money is lent by third parties, they have no claim against the partnership when it is formed, but are limited to their recourse against the individual partners with whom they had transacted (a). It makes no difference that the goods furnished or the money borrowed were applied to company purposes. The public creditor really contracted, not with the company, but with an individual; (a) Smith v. Craven, 1 Cr. and J. 500; Greenslade v. Dower, 7 B. and C. 635; Dickinson v. Valpy, 10 B. and C. 141, 3 Ross L. C. 571; Fisher v. Tayler, 2 Hare 218; Saville v. Robertson, 4 T. B. 720; Wilson v. Whitehead, 10 M. and W. 503; Barton v. Hanson, 2 Taunt. 49. See White v. MIntyre, 1841, 3 D. 334, for opinions of judges adopting the English authorities quoted above. and the company were only concerned to see that their partner made good his contribution, get it how he might. Nay, even if he had been a partner at the time when he entered into the transaction, the company could only be bound where the contract had proceeded directly or by implication on its credit (a). But if it appear that the transaction out of which the obligation Exceptions. Agency before arose was entered into with the knowledge and approbation of formation. those who afterwards became partners, so that they led the creditor to contract on the faith of their responsibility, they will be held liable (6). In such cases, however, the partners are not liable in virtue of the partnership contract, or as sureties for a company debt, but in respect of an agency, express or implied, existing between them before the partnership came into existence (c). after forma Partners may also become liable for the debts and obligations of Ratification their copartners, though entered into before formation of the firm, tion. if after that event such obligations, or the transactions of which they are the consequences, have been adopted, ratified, or homologated by the company. Thus, if the company grant a bill for a debt not contracted by itself, but by its promoters, the partners will be bound (d); and so, a person who became partner with the lessee of a house after the commencement of the lease, and jointly agreed with him to pay additional rent for additional accommodation, was found liable as a partner for the whole rent (e). One of the most important consequences and illustrations of the Promoters. legal principle now under consideration, will be found in the wellestablished rule of law, that the promoters of joint-stock companies, e.g. railway companies, etc., have no power to bind the company when it comes into existence by its special act or otherwise, for such debts It need scarcely be observed that the debts or obligations of a (a) White v. M‘Intyre, supra; Jardine v. Macfarlane, 1828, 6 S. 564; Venables v. Wood, 1839, 1 D. 659. (b) Gouthwaite v. Duckworth, 12 East 421, 3 Ross L. C. 541. See White v. M'Intyre, 1841, 3 D. 334, opinions of judges. (c) See per Lord Eldon in ex parte Peele, 6 Ves. 602, Coll. 362. (d) Lloyd v. Ashby, 2 Car. and Pa. 138. (e) Hoby v. Roebuck, 2 Marsh. 434. partner joining a firm already formed, can never affect either the firm or its partners, unless guarantee or homologation in some form. or other can be established. The very important question, whether a person joining an existing firm becomes liable for its debts and obligations already incurred, is attended with much more difficulty; and it cannot be said that our tribunals have as yet authoritatively recognised any very distinct theory or set of legal principles of invariable application in the matter; for though cases in which the question was involved have occasionally presented themselves for decision, they have been so complicated with special circumstances, that the judg ments pronounced can hardly be taken as exponents of abstract doctrine. If, in order to elucidate the subject, recourse be had to the law of England, numerous authorities will be found dealing with the question both in its pure form and as affected by circumstances; but it will be felt that the practical rules there enunciated, though extremely equitable in themselves, cannot be blindly fol lowed as precedents in Scottish practice, as they are, to some extent at least, based on a theory peculiar to that system, and unknown in the law of Scotland. It is probable, indeed, that in this as in many other instances, a careful investigation will disclose the same equitable principles underlying the technical peculiarities of both systems, and leading by different theoretical processes of reasoning to similar results in practice. Yet it is necessary, in a question of such importance as that now under consideration, to obtain, as far as possible, clear views of the theoretical principles recognised in both systems, before determining how far and to what effect the practical rules of the one are precedents of authority in the other. We shall accordingly proceed with the investigation of this question by adverting, at the outset, to such equitable considerations as present themselves irrespective of technical reasoning; we shall next refer to the theory and practice of English law; and we shall then endeavour to ascertain what the decided cases point to as the Scottish theory, and what are to be taken as its practical consequences. If the mere fact of joining a firm or private company already in operation were to be held as sufficient to involve a party in liability for all its debts and obligations previously contracted, it might be argued with great force, that persons would often be rendered liable for obligations about whose contraction they were never consulted, and of whose very existence they were ignorant; that creditors would be furnished with a security for which they had never bargained, and which they could not possibly have had in view; and that as the entrance of new partners into the firm does not injure, so there is no reason why it should benefit, a previous creditor. Yet, plausible and equitable as these arguments appear, it may be fairly questioned whether they are not at least balanced by considerations on the other side. He who of his own accord enters an existing partnership, without ascertaining its liabilities, or without obtaining sufficient security from the old partners against them, can hardly be acquitted of gross negligence. It must also be noted that, in some cases, the entrance of a new partner may really injure the position of a previous creditor. The new partner, by his very entrance, acquires a right to share profits, and thereby to participate in the very fund intended to meet the obligations of the firm. His contribution may indeed equalize this; but what if he makes no pecuniary contribution, or one that is inadequate or illusory? Furthermore, it must be observed that a creditor's chance of payment often depends very much on the success with which the business is carried on, and this again obviously depends on the prudence and ability of those by whom it is conducted. Yet the incoming partner becomes an agent for the firm like the others; and while its prosperity may be augmented by his exertions, its want of success or total ruin may be the results of his ignorance or recklessness. Now, as the creditor is never consulted as to the qualifications of the new partner, upon whose admission so much may come to depend, it seems rather inequitable that a stranger should be allowed to enter a firm on any other terms than those of adopting its existing liabilities in common with the other partners. In this conflict of equitable considerations, the law of England English law. has adopted the following rule as a general principle:-No person who is admitted as a partner into an existing firm, becomes by his entry liable to the creditors of the firm for anything done before he became a partner. In the words of Lord Kenyon, 'it would be carrying the liabilities of partners for each other's acts to a most unjust extent, if we suffered a new partner to be bound Limited in its application. Tendency of the English courts. in this manner for an old debt incurred by other persons' (a). But apart from équitable considerations, this rule is also said to be a consequence of the English theory of partnership; for as in that system the partners are not considered to be agents for the quasi person of the firm, which indeed the law does not recognise, but are deemed to be agents mutually for each other, it is argued that an incoming partner is not bound by obligations which were contracted by the other partners before they had in any sense become his agents. By referring, however, to the decisions last noted, it will be seen that the rule here stated merely amounts to a presumption in law that the incoming partner had not agreed to undertake such obligations; and that this presumption may readily be overcome by evidence of facts and circumstances to the contrary. Thus, payment of old debts, accompanied by evident knowledge of the existence of such debts, and benefit derived from the contracts on which they are founded, have been held sufficient to warrant the conclusion that the incoming partner had agreed to undertake such previous obligations (b). The tendency of the English courts is undoubtedly to infer this agreement from apparently trivial circumstances (c). But a distinction is made between an agreement to share liability inter socios, and an engagement to incur liability to the public; and it is held that the former does not involve the latter. For it is argued, that as creditors look only to the credit of those who are partners when the debt is contracted, a private arrangement, whereby an incoming partner undertakes to assist the others in their difficulties, cannot infer liability to those who were no parties to the arrangement (d). Of course the signing of the company firm to any document acknowledging the debt will effectually bind the incoming partner, if this be done with his consent or authority after his accession to (a) Per Lord Kenyon in Shirreff v. Wilks, 1 East 48, 3 Ross L. C. 488. See also Catt v. Howard, 3 Stark. 5; Young v. Hunter, 4 Taunt. 582; ex parte Jackson, 1 Ves. jun. 131, Coll. 362, Lindley 317; per Parke, J., in Vere v. Ashby, 10 B. and C. 297. (b) Ex parte Jackson, 1 Ves. 131; ex parte Peele, 6 Ves. 602; Helsby v. Mears, 5 B. and C. 504; ex parte (c) Lindley 317; Coll. 362; Cooke's Bank. Law 534 (8th ed.). (d) Vere v. Ashby, 10 B. and C. 298, per Parke, J.; ex parte Williams, Buck 13; ex parte Freeman, Buck 471; ex parte Fry, 1 Gl. and J. 96. |