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

Facts of the Case

The case concerns whether an innocent partner is liable for the fraudulent act of a co-partner when the act was arguably within the apparent scope of the firm's business.

• The Firm: Messrs. Hughes, Masterman, and Rew, a firm of solicitors.

• The Fraudulent Act: Mr. Rew, one of the partners, received 280 De Beers shares from Mr. Rhodes, allegedly as collateral security for a loan. Mr. Rew subsequently fraudulently misappropriated these shares.

• Client Relationship: Mr. Rhodes had previous dealings with the firm where the firm, acting as a unit, had been involved in negotiating loans and handling securities on his behalf.

• The Claim: Mr. Rhodes sued the innocent partners (Hughes and Masterman) to recover the loss, arguing they were jointly liable for Mr. Rew's actions.

Issue

Whether Messrs. Hughes and Masterman, as partners, were liable for the loss incurred by Mr. Rhodes due to Mr. Rew's fraudulent misappropriation, specifically determining if the act of receiving and holding the shares was done by Mr. Rew in the ordinary course of the business of the particular firm.

Judgment

The Court of Appeal found that Messrs. Hughes and Masterman were liable for the loss. The Court concluded that Mr. Rhodes was justified in assuming that Mr. Rew had the authority of the firm to receive the shares.

Legal Analysis

1. The Test: Ordinary Course of Business of the Particular Firm

The Court acknowledged that to hold the firm liable for a partner's wrongful act, the act must be shown to have been done in the ordinary course of business of that particular firm (not necessarily the general practice of all similar firms).

• Established Course of Dealing: The previous transactions between Mr. Rhodes and the firm were key. This pattern showed that the firm was in the habit of acting for Mr. Rhodes in matters involving negotiating loans and handling securities.

• Ostensible Authority: Based on this established relationship, Mr. Rhodes was led to believe, and was justified in believing, that when he handed the securities to Mr. Rew, Mr. Rew was receiving them on behalf of, and with the authority of, the entire firm.

  • The act of receiving the shares was therefore within the ostensible or apparent scope of the particular firm's business with that client.

2. Distinction from Cleather v. Twisden

The Court distinguished the present case from Cleather v. Twisden, where taking custody of bearer bonds was held to be outside a solicitor's ordinary business. In Rhodes v. Moules, the specific circumstances and the firm's habitual course of dealing with Mr. Rhodes broadened the scope of what was considered "ordinary business," encompassing the handling of securities related to loans.

3. Conclusion on Liability

Despite the innocent partners (Hughes and Masterman) having no express knowledge or authority for the specific transaction, their partnership relationship with Mr. Rew, combined with the firm's prior course of business, meant they had not discharged themselves from liability. The firm, therefore, had to bear the loss caused by their partner's fraud.

Commentary: Liability and Ostensible Authority

Rhodes v. Moules is a cornerstone case demonstrating that a partner's authority (and therefore the firm's liability) is determined not just by the general nature of the trade, but by the specific, habitual course of dealing that the firm has established with a client.

The ruling establishes the following critical principle (which is central to the concept of implied/ostensible authority under partnership law):

A client dealing with a partner in good faith is entitled to rely on the apparent authority created by the firm's history and behavior. If a partner commits a wrongful act (like fraud or misappropriation) while appearing to act in the transaction of the firm's business, the firm is liable because the client had reason to believe the partner was acting on behalf of all.

This protects the client and reinforces the notion that every partner is an agent of the firm and his other partners for the purposes of the business of the partnership.