(NO. 123.) SECOND READING. (Hansard, 13 June 1865)

§ LORD STANLEY OF ALDERLEY,
in moving the second reading of this Bill, observed that its main object was to enable persons to lend money to traders and receive a share of profits without rendering themselves liable to the law of partnership. According to the law as it now stood, a person might lend money to any extent to a trader and receive interest to any extent without being constituted a partner or rendering himself liable to the engagements of the trader if he became bankrupt; but if he lent money on the condition of receiving a share of the profits he became liable to all the engagements contracted by the trader, and subject to all the conditions of partnership. He could see no good reason for the distinction between these two sets of money-lenders, or why they should be treated in a different manner. Since 1855 the principle of limited liability had been very generally applied to all large undertakings in the country, and it had been complained that they had thereby conferred an advantage on partnerships of more than six partners over the private trader. This Bill might, therefore, be considered as a complement to the Limited Liability Acts by placing private traders on the same footing with the great companies. In this respect the private trader would receive a great advantage, and at the same time he thought the creditor would derive greater security than he obtained at present. Besides enabling a person lending money to obtain a share of profits, the Bill proposed to allow a widow or child of a deceased partner to receive a share of profits without becoming a partner, which they could not do at present without rendering themselves liable to the debts of the concern. It would also enable a trader to give a clerk or servant a share of profits as a part of or in addition to a salary without making him a partner. This would operate as an addi- 117 tional inducement to the clerk or servant to exert himself in the successful prosecution of the business. These propositions constituted a measure which he believed would be found most useful to many honest and struggling traders, and to the public at large, and one which he trusted their Lordships would not refuse to pass.

§ LORD ST. LEONARDS
considered this the most important law in reference to the law of debtor and creditor that had ever been presented to their Lordships for consideration. The principles which regulated the obligations of partnership were well known. It was a perfectly established doctrine that if a man took the profits of business he must be content to take the losses too. This law had led to the flourishing state of the country. If a man entered into trade he did so with a view to profit. He gave to that trade the whole energy of his mind, his time, thoughts, and genius. It was on this foundation, the individual exertion of every man, that the prosperity of the country rested. But by this Bill the capitalist, instead of going into business and taking upon himself its cares and labours, would skulk behind some one else and escape all liability while receiving the return for his capital from the gains of the business. His noble Friend said that that measure was a sort of set off to limited liability; but limited liability was a dangerous thing, which had already much altered the character of trading in this country. It was greatly to be desired that the Government would take a comprehensive and statesmanlike view of the whole matter, and consider the general operations of all these limited companies, instead of asking their Lordships to deal with these measures piecemeal and one by one. Mortgage debentures would be floated in millions by these companies, and was it to be supposed that Exchequer Bills could hold their ground against them? It would be most mischievous to encourage partnerships in which men with a certain capital could sweep away the lion's share of the profits without incurring any risk or performing any labour. Wholesale traders took great pains to ascertain the solvency of retail traders, but a man's name might be over his shop door with nothing to indicate that he was not the master, whilst in fact a large portion of the profit might belong, under a private arrangement, to some other 118 person. On the other hand, the shopkeeper himself, when he calculated his savings, would feel deeply his having to account to his sleeping partner for a large portion of them. These loans stood upon a different footing. They, to be effective to the lender, could not be concealed, and the borrower is still the master of his own trade. If an excessive rate of interest were taken, it would probably in the end lead to the ruin of both lender and borrower. By this Bill, if a man sold his business and reserved to himself the profits of half, he would not share half the liability, as he ought in fairness to do, but would escape altogether; while, on the other hand, if he retained the whole business in his own hands, he would be liable for the whole of the risks of the concern. That was something so monstrous that the very statement of it ought to make their Lordships hesitate in assenting to the second reading of that measure. A more dangerous blow could not be struck at the trading credit of the country than would be inflicted by such a Bill.

§ LORD CRANWORTH
said, the Bill simply enabled a person to borrow from another a certain sum of money on certain conditions. Who did the present law protect—the lender or the borrower? Not the borrower, for at present one man might borrow and another lend a sum of money at an interest of 5, 10, or 15 per cent, or on any other terms that might be agreed between them. The noble and learned Lord opposite (Lord St. Leonards) seemed to think, however, that this measure would operate hardly on the creditor; but the creditor's remedy would not really be affected by it; it would remain as it was before. If the creditor recovered a judgment against the partnership he could take the partnership assets. Unless this Bill, or a Bill of a similar description, were passed, a very grievous injury would be inflicted on private traders, who had to compete with companies now having the benefit of limited liability.

§ LORD WENSLEYDALE
was understood to say he had no objection to the principle of the Bill provided certain alterations were made in some of its clauses. His proposed Amendments would have destroyed the Bill.

THE LORD CHANCELLOR
said, he should be sorry if the able arguments of his noble and learned Friend, which, in common with the majority of the House, he had not had the good fortune to hear 119 with sufficient distinctness, induced any of their Lordships to vote against the second reading of this Bill, which had been introduced for the purpose of freeing the law of partnership from an anomaly founded upon an erroneous decision pronounced many years ago, and which had led to the most mischievous consequences. It was a principle of almost every system of jurisprudence that partnership depended on the conduct and intention of the parties, and that where there was a contract and agreement between the parties the law should declare the existence of a partnership, but that where there was no such contract and agreement the law should not force a partnership upon parties. There was one exception—where the parties had held themselves out to the public to be partners, the law held them to be partners, whether they had contracted to be so or not. But the principle of the law of England, as construed by a decision given nearly 100 years ago, went to the extent of declaring that in any case where individuals shared the profits of an undertaking they should be partners in the eye of the law, notwithstanding any agreement to the contrary which they might have entered into among themselves. This was in consequence of an imported contract under which a person receiving in any form any portion of the profits was held to be liable to his last shilling. Such was the extraordinary rule of law to which the patience of the English people had submitted so long, solely from reverence for what was hallowed by ancient precedent. That principle was a most unjust one, and it was repugnant to the principles of English law. It had, however, taken its rise from the natural tendency of our courts to give validity to a contract if they could possibly do so. A case came before Lord Mansfield in which he found he could not do so in consequence of the very large rate of interest which would have rendered the contract void under the then existing usury laws. In order, therefore, to uphold the agreement between the parties, Lord Mansfield ruled that it should be upheld as a partnership. By general consent the usury laws, the parent of the principle of partnership against which this Bill was directed, had been done away, and it was time now to get rid of their mischievous off-spring. In other cases the law of England had taken great care to prevent fraud. If a man handed over money or goods to a trader, that money or those goods were 120 liable to the trader's creditor; but that was a very different thing from making a man liable to not only the full amount which he had lent to a trader, but to the last farthing which he possessed in the world. Under the ruling of Lord Mansfield, acted on by the Judges, the law invented a contract which did not exist, and then made the parties to that supposed contract liable for the fulfilment of engagements which they had never intended to undertake. The ratio decidendi was expressed in a judgment given in 1784: it was in the case of "Grace V. Smith." The Lord Chief Justice said the only question was what constituted a secret partnership: every man who had a share of the profits of trade ought to bear his share of the loss, and if any one took a part of the profits he took a part of the fund on which the creditor trader relied for payment. Now, in the present day, the absurdity of this was obvious to a child in a national school, for he would know enough political economy to understand that the profit or loss was realized after the creditors had been paid. Nor could fraud arise; the law of England had taken care to prevent fraud. If one man handed over his money or his goods by way of loan to a trader, so that he had the visible possession of the money or the goods, the creditor of the trader had a right to seize the goods or money so handed over. But to show the erroneous principles to which the present state of the law gave rise he would read part of a judgment of the noble and learned Lord (Lord Wensleydale) in which he laid down that the person who shared the gross profits was not a partner; and the person who shared the net profits was a partner. Such was the offspring of the old erroneous principle which was about to be swept away. If this distinction was read to any City man, he would toss up his head, and ask what was the difference between gross profits and net profits. But there was another absurdity. Now, where was the difference between the two cases? Again, if a person in trade said to his clerk "I shall give you £500, which you shall take out of the profits," the clerk at once became a partner; but if the employer said to him "I shall give you £500 a year if I make £1,000," not adding words stating that the £500 was to come out of profits, the clerk was not a partner. Such were the artifices which lawyers were obliged to make use of in order to apply this principle of partnership. They were obliged 121 to go round and traverse and make use of subtle distinctions, which brought the law into contempt, because it put it at variance with the common sense of mankind. Trade contracts ought not to depend on subtle distinctions, or what was called "Judge-made law," but on the wholesome and well-established principles of the law of England. The object of this Bill was to remove an objectionable exception. It was a Bill of great importance to the community, for, if there were one principle better established in reason and common sense than another, it was that trade should be free; that mercantile contracts should be free; that those contracts, as far as they possibly could be, should be construed in accordance with the intentions of the parties; that they should be upheld by law, and take effect just as they had been intended to take effect. The principle which this Bill would put an end to had a very injurious operation as regarded encouragement to industry and talent. A man might be willing to encourage industry or talent by an advance of £1,000 or £5,000 towards a doubtful enterprize; but he was unable to do so because of the frightful consequences of those decisions staring him in the face. He thought it was time to declare that the law of partnership should be of a more liberal character and more in accordance with the English law generally. It had been the policy of our laws to make trade in land free, because it had been determined that property should not be locked up for longer than a particular time. The general policy of our law was in accordance with the principles of political economy, but the partnership law as it existed in virtue of judicial decisions was an exception. He trusted that their Lordships would give their countenance to a Bill which was wise and prudent in its design, and which would be of great advantage to the mercantile and commercial interests of the country. He believed that many of the social difficulties which now existed between employers and employed would probably be removed by the operation of this Bill. There were many classes of intelligent workmen whom wise employers would desire to bind to a concern by giving them an interest in its welfare, and making their remuneration depend on its success. That could not now be done, but if this Bill were passed, it would be possible to establish such a binding tie as this between employers and employed. If that were the result of the measure, he 122 was sure that their Lordships would agree that a more beneficial and wholesome measure could not be introduced into Parliament.