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

Facts of the Case

The Appellants (Mollwo, March & Co.), London merchants, sued to recover debt owed by W.N. Watson & Co. The central question was whether Rajah Pertab Chunder Singh, who had financed the firm, was liable as a partner.

• Financial Arrangement: The Rajah provided substantial financial support to the Watsons, who lacked capital.

• The Agreement (1863): An agreement was executed between the Rajah (financier/creditor) and W.N. Watson & Co. (debtors) which granted the Rajah:

  • Commission on Profits: A 20% commission on the profits of the business.

  • Control/Supervisory Powers: Control over various aspects of the business (e.g., sanctioning future advances, checking accounts) in return for forbearance on past debts and continued support.

• Subsequent Arrangement: Later, the Rajah received a formal mortgage on the firm’s tea plantations in exchange for releasing certain rights.

• Actual Conduct: The Rajah seldom exercised the sweeping supervisory powers granted by the deed, never took possession of the properties, and did not receive the commissions.

Issue

Whether the agreement between the Rajah and W.N. Watson & Co., which granted the Rajah a commission equivalent to a share of profits and significant supervisory control, held the Rajah liable as a partner for the firm's debts to the Plaintiffs.

Judgment

Their Lordships of the Privy Council held that the Rajah was not liable for the debts of the firm of W.N. Watson & Co. The appeal was dismissed.

Legal Analysis

1. Rejection of Profits as Conclusive Test

The Court, following the principle established in Cox v. Hickman (1860), affirmed that the sharing of profits is a strong test of partnership, but not the decisive one.

• Intention is Paramount: The existence of a partnership "must depend on the real intention and contract of the parties."

• Nature of Payment: The Rajah had no direct ownership or interest in the profits themselves; he was entitled only to a commission or payment equivalent to one-fifth of the profits amount. This payment served primarily as a method of securing repayment of past advances and as consideration for further financial support and forbearance.

2. Absence of Mutual Agency (Principal/Agent)

The Court meticulously examined the nature of the control exercised by the Rajah:

• Control was Restrictive, not Initiatory: The Rajah had powers of control only (supervisory and restrictive). He lacked initiative power; he could not direct what goods should be shipped, what consignments should be ordered, or what should be the general course of trade.

• Lack of Common Benefit: The trade was not agreed to be carried on for the common benefit of the Watsons and the Rajah in a way that would create a partnership.

• Principal's Liability: The Watsons were not acting as the Rajah's agents or as principals for him in the trade. If there was no partnership, the implied agency that flows from that relation cannot arise.

3. The True Relationship

The Privy Council concluded that:

The agreement in terms and, as their Lordships think, in substance, is founded on the relation of creditor and debtors, and establishes no other.

The provisions, including the 20% commission and the supervisory powers, were designed merely to give the creditor (Rajah) security for his advances and a measure of control to prevent the debtors from mismanaging the funds and assets.

Commentary

Reinforcing the Cox v. Hickman Principle

Mollwo, March & Co. serves as a crucial case in the evolution of partnership law, solidly reaffirming and applying the Mutual Agency Test established in Cox v. Hickman.

The case clearly distinguishes between:

1. A Partner (Principal): Who carries on business on behalf of and with liability for all co-partners (the essential agency).

2. A Creditor/Financier: Who takes a share of profits or supervisory powers purely as a form of security or interest on a debt.

The ruling holds that even substantial financial control over a firm, if exercised primarily to safeguard a loan and if lacking the power to initiate and direct business, will not transform a creditor into a partner. The fundamental determinant remains the true intent of the parties to act as principals and agents for each other in carrying on the business.