Whitehill v. Shickle

Bliss, Judge,

delivered the opinion of the court.

Suit was brought upon a contract between the parties, by which the plaintiff agreed to devote his time and advance the necessary funds until the profits should meet the expenses, for the manufacture and sale of a patent filter invented by defendants. He was to receive one-third of the net profits arising from the sale of the filters and the disposition of rights to the patents, and, after deducting all his advances, he was to pay to defendants two-thirds of the net proceeds of the business, and reserve to himself one-third, both to cover his interest and pay for his services. The defendants agreed to indemnify him from any losses that should oecur in the business for the first four months, and pay him the amount of these losses upon his making an exhibit. The business was to be conducted on the cash system, in the name of the plaintiff; and at the end of the year, if he did well, he was to receive a deed of one-third of the patent right; but if he should withdraw from the business within the year, he was to be paid for his services. The agreement is long and inartificially drawn, but the above statement contains all that is necessary to understand the principles that should govern the case.

At the end of the four months the plaintiff made a statement of the business and gave it up, and this action is for advances made under the contract and for his services. The case was heard before a referee, who reported in favor of plaintiff, and judgment was rendered for $1,144, which was affirmed at general term, and the case is brought to this court by appeal.

Several questions were made below and brought here. The first is founded upon the fact that the agreement was not properly *543 stamped, the stamp having been affixed after the suit was brought. But no issue upon this point is raised by the pleadings. So far from defending on this ground, defendants expressly admit the contract, without alluding to its legality; and even if they raised the question, it was competent to show that the omission was not made “ with intent to evade the provisions of the act” of Congress requiring the stamp. (See 15 U. S. Stat. at Large, 481., act of March 3, 1865 ; Beebe v. Hutton, 47 Barb. 188 ; Hitchcock v. Sawyer, 39 Verm. 412 ; Vorebeck v. Roe, 50 Barb. 302 .)

A recovery is objected to in this action on the ground that the contract is one for a partnership, and, for that reason, that the petition should be in the nature of a bill in equity for the settlement of the partnership accounts.

Between partners an action at law will lie upon matters outside the partnership, or where the dispute is so disconnected with the general partnership accounts as not to involve their investigation and settlement. (Pars, on Part. 276 ; Ad. Eq. 239-40; Gilpin v. Enderly, 5 Barn. & Ald. 954.) But the contract as between the parties, rvhile it provided for and contemplated a partnership, had not ripened into one when the plaintiff left. A partnership necessarily involves a community of profit. It is a contract for the mutual benefit of the parties. This community of profit includes a liability for losses, though the contract is the measure of that liability. The question has been often discussed whether, in order to constitute a partnership inter se, there must necessarily be a community of losses as well as profits. The older English cases regard a liability for losses, or rather an interest in the losses, as an essential ingredient of partnership as between the partners. The remarks of the court in Bond v. Pittard, 3 Mees. & W. 357, though there was no express decision upon the matter of partnership, implied that some interest in the losses was necessary. The case of Gilpin v. Enderly, 5 Barn. & Ald. 954, is referred to in the modern text-books as decisive of the question that one may be a partner with an express covenant against losses. This was an action somewhat similar to the one at bar. The plaintiff and defendant had entered into a contract as partners in the business of army clothiers for ten years, by which *544 Enderly (the' plaintiff below) was to advance £20,000 of the capital stock, and was to receive absolutely out of the concern £2,000 per annum as his full share of the profits, and at the end of the partnership the full amount of his capital advanced. The action was against Gilpin upon the covenant, and the defense set up usury ; that the partnership, as it involved no responsibility for loss, was but a corrupt and fraudulent cover for ten per cent, interest, when the law only gave five per cent., and therefore the covenant was null. Upon replication denying the corrupt or unlawful object of the covenant, the jury gave a verdict for plaintiff, and the case was brought to the King’s Bench by error. The court sustained the verdict, though in calling the instrument a partnership contract its language is very peculiar. The hardship of the forfeiture of £20,000 for usury doubtless weighed upon both the court and jury; and, in delivering his opinion, the Chief Justice leaned upon, or rather threw the responsibility upon, the jury, who had found that the deed was not an usurious contrivance. He calls it a partnership “of a peculiar kind”— “ of an unusual kind.” The only thing authoritatively decided ivas that the deed was not an usurious one, though the reason might have been that it was a peculiar kind of partnership. The cases are very numerous in this country where this matter is discussed, and the general doctrine is that, in order to constitute general partnership as between the partners, there must be some kind of liability for the losses of the concern. Indeed, it is difficult to See how one can be a partner in, can participate in, the fortunes of a business, without being subject to those fortunes.

“To constitute a partnership between the parties themselves, there must be a communion of profit between them. A communion of profit implies a communion of loss, for every man who has a share of the profits of a trade ought also to bear his share of the loss.” (Collier on Part., book 1, § 18.) Kent defines the contract in reference to its business to De one “to divide the profit and bear the loss in certain proportions.” (8 Kent’s Com. 24.) Story indorses the same liability for losses, while making “ communion of profit” the essence of the contract. I do not find Parsons sustained in his remark, in the opening of chap. 5 *545 upon partnership, that “the weight of authority, as well as of reason, seems to be decidedly in favor of the rule that there may be a legal and valid partnership, although one or more of the partners are guaranteed by the others against loss.” If he means that such persons may be partners as to those who trust them as such, he is right, and to these persons they are liable for the debts of the firm, notwithstanding the guarantee; but to bold them general partners as to those who have given them the guarantee is to overthrow all our ideas of the incidents of partnership. It must be one “ of a peculiar kind,” and some other term should be used in reference to it.

Mixed up with stipulations that could apply only to partnership contracts, there was, in that under consideration, an express provision to indemnify the plaintiff and pay him for all losses that should occur in the business during the first four months, with the proviso only that he should at the end of that time make a correct exhibit of the business ; and in another part of the paper is an agreement to pay him the value of his services if be should leave. In reference to these provisions, the only reasonable construction I can put upon the contract is, that the joint liability was not to commence until the expiration of the four months; that the defendants were to take all the risk for that period, and from that period the parties might go forward as parties under the general provisions of the agreement. The defendants had confidence in their invention, and induced the plaintiff to take hold of it and bring it into market. With him it was an experiment, and without trial he would risk nothing. Even if plaintiff were deemed a partner, here was an express covenant to pay him his losses, or the amount of his advances less his receipts, as shown by the exhibit — for all the money put in was his — and let him retire. He has retired, and only seeks what they have agreed to pay him, and a full settlement of the partnership accounts is not at all necessary to ascertain their indebtedness. It is a matter simply of computation, without estimating stock debts and credits. The debt is due plaintiff, whether the stock on hand sells for little or more or does not sell at all, and whatever may become of the debts and credits. This case is unlike that of *546 Meyer v. Field, 37 Mo. 434 , to which we are referred. That was an action at law against admitted partners for what plaintiff claimed would he due upon settlement of partnership accounts without seeking a legal settlement. This was an action upon an express contract to pay an agent or retiring partner, as defendants claim, a sum that can be ascertained without a settlement of the partnership accounts.

One of the points made by defendants is based upon an alleged violation of the agreement by the plaintiff in the manner of his conducting the business. This ayouM have been a proper subject of counter claim if it had been charged upon him as a substantive claim, and specific damage alleged and proved. But we do not find what damage the defendants have suffered, or whether they have suffered any; and the only counter claim sought to be set up is for a $5,000 penalty named in the agreement, to which, as a penalty, they cannot be entitled; and in claiming this penalty they do not assign specific breaches, so as to advise him of the motive of their demand. A general statement that a party totally disregarded all, and did not fulfill any, of the covenants and stipulations to be kept and performed, and made by him in the written instrument,” etc., is altogether too general to support a demand, especially for a penalty.

The claim that plaintiff was bound to stay and settle up the business of the partnership after the four months had expired, so strenuously urged by defendants, is wholly inconsistent with his right to leave. It would have detained him in the business for months, and it does not appear that defendants desired that the business should be closed up. All the business and property went into their hands; and the plaintiff went out, as they agreed he might, and only asks what he invested in time and money.

The report of the referee was excepted to, and the foregoing opinion covers all the points made by the exceptions. . Judgment affirmed.

The other judges concur.