Eastman v. Clark. in the business of Stillings. On the contrary, the two parties respectively continued to carry on their business on their own behalf alone, although they had bound themselves to pay over a part of what they received. See 3 Kent's Com., 12th ed., 25, note 1, citing cases of "arrangements for pooling profits." Various questions may, in other cases, arise as to the practical operation of the rules of law relative to the liability of originally undisclosed principals. Suppose A employs B to make a purchase in B's name for him (A), upon a secret agreement between A and B that A is not to be responsible to the seller for the price, can the seller, upon subsequently discovering that A employed B to make the purchase, sue A for the price? Can the limitation, that A was not to be responsible, be held nugatory, as being inconsistent with A's direction to B to effect the purchase? Or, can the limitation be regarded as presumptively fraudulent, and hence invalid on that ground? See the remarks of BRAMWELL, Baron, in Bullen v. Sharp, L. R., 1 C. P. 86, pp. 126, 127, quoted in a subsequent part of the present opinion. In some cases A might, perhaps, be held liable on the ground of estoppel - as where B is a London Broker, and the pur chase which A employs him to make is in the ordinary course of brokerage business. "A broker always professes to make a contract between two principals. * In every case, therefore, where the sale is to a broker, the vendor knows that there is or ought to be a principal, between whom and himself there is established a privity of contract, and whose security he has in addition to that of the broker; and the principal also knows that the vendor is aware of this, and to some extent trusts to his liability. This is, therefore, a very different kind of case from that of a person selling goods to a person whom at the time of the contract he supposes to be a principal." BLACKBURN, J., in Armstrong v. Stokes, L. R., 7 Q. B. 598, p. 607. In such a case, A may be regarded as allowing B to hold himself out as authorized to bind the unnamed principal by the contract of purchase. None of these questions, however, arise in the view that I am disposed to take of the present case for I do not regard Stillings as a principal in the business of the Ciarks, or as having authorized or employed the Clarka to make the purchase of the plaintiff. * * Different opinions have been expressed on the question whether the sharer of gross returns is, by operation of law, liable to third persons as a partner, in spite of an undisclosed agreement negativ Eastman v. Clark. ing such liability. 2 Am. Law Review, 9, 10, 198; Pars. on Partnership, 88, note q.; Story on Partnership, 6th ed., § 34, n. 1; CROMPTON, J., in Lyon v. Knowles, 3 Best & Smith, 556, p. 564; MARTIN, B., in Hickman v. Cox, 3 C. B. (N. S.) 523, p. 562; instructions to jury by PARKE, B., in Hcyhoe v. Burge, 9 C. B. 431, p. 440. (Several of the cases sometimes cited on this point were really decided on other grounds; some of them on the ground that the "sharing" was merely a mode of compensating for services openly rendered.) The question has not often been fully considered on general principles. In some instances, the point most discussed is, whether the case of the sharer of gross returns comes within the letter or the reason of a rule of law which has sometimes been supposed to exist in relation to the liability of the sharer of net profits. It has sometimes been supposed to be the rule of the common law, that one who makes a secret agreement with the ostensible manager of a concern that he shall share in the net profits but shall not be answerable for losses is, nevertheless, by operation of law, liable as a partner to third persons for all the debts of the concern, although he was never held out as a partner, or relied on as such by those dealing with the concern, and although he has never in fact received any profits. One reason given for the supposed doctrine is that, if any one takes part of the profits, he takes part of the fund on which the creditor of the trader relies for his payment; or, in other words, that, by taking a part of the profits, he takes from the creditors a part of that fund which is the proper security to them for the payment of their debts. The question has been raised, whether consistency to the supposed "net-profit rule" requires that a sharer of gross returns should be held to a similar liability. On the one hand, the letter of "the net-profit rule" has been looked at without regard to its reason. It is said, in substance, that gross returns, though they include net profits, are not literally the same thing; that a participant in gross returns does not participate in profits as profits; and that a division of gross returns is only incidentally a division of profits, not a division of profits as such. This reasoning is extremely unsatisfactory. On the other hand, it is said that the reason of "the net-profit rule" applies with much greater force to the sharer of gross returns. Gross returns necessarily include net profits. If the Eastman v. Clark. sharer in net profits takes from the creditors the fund upon which they rely for payment, much more does the sharer in gross returns. And, if taking from the fund is sufficient reason for holding the former liable, a fortiori, it is a reason for holding the latter. Not profits "are only to be ascertained after deducting and providing for all liabilities; but the amount of a share in the gross proceeds would be ascertained, and might be taken away as soon as they were received, without providing for the liabilities." See O'BRIEN, J., in Shaw v. Galt, 16 Irish Com. Law, 357, 373. This train of reasoning appears to be unanswerable. If, then, the supposed "net-profit rule" is founded in reason and is to be upheld, consistency requires that the defendant Stillings should be held liable. It seems, therefore, hardly possible to avoid meeting, in this case, the question whether the supposed netprofit test, "in its literal and unqualified form," is a sound rule of law, founded in reason. (It is not proposed, in this opinion, to enter upon the inquiry how far the supposed test has ever been actually adopted as the basis of judicial decision.) The intrinsic correctness of the supposed test has been so often and so successfully disputed, that the views now about to be presented are little more than a mere compilation. One of the principal reasons urged in favor of the supposed doctrine is that already adverted to, viz.: that the man who takes part of the net profits, takes part of that fund on which the creditor of the trader relies for his payment. The short answer to this reason is, that it is founded on a false assumption. Creditors neither can, nor do, rely on net profits for payment. Net profits "do not exist until creditors are paid." Testimony of Commissioner Fane, quoted in Story on Part., 6th ed., § 36, note 3. The very fact that net profits are realized "presupposes that the creditors of the firm are satisfied, or that the partnership assets are sufficient to satisfy their claims." 2 Am. Law Review, 195. And if it were possible in the nature of things for creditors to rely on the net profits as a fund for the payment of their claims, it is not probable that they would do so; for they must know that the amount of the net profits would generally be insufficient for that purpose. Another reason given for this rule is, that if one stipulates for an interest in the profits of a business which would entitle him to an account, and give him a specific lien or a preference in payment over other creditors, giving him the full benefit of the increased VOL. XVI.-26 Eastman v. Clark. profits without any corresponding risk in case of loss, it would operate unjustly as to other creditors. This reasoning is effectually disposed of by Mr. Gray, in his notes to the 6th edition of Story on Part., § 49, note 2, as follows: "The creditors to whom he is preferred are only the separate creditors of the actual partners; he has no preference over the partnership creditors, for there are no profits till they are paid, and it is only out of the profits that his remuneration is to come. Why should the fact that he has a priority over one set of creditors make him liable to his last shilling' to another set of creditors? A second mortgagee has a priority over the mortgagor's general creditors; but has it ever been argued that therefore his whole property, of every kind, should be liable for the first mortgage debt? Yet the cases would seem very analogous. And though a partner is entitled to an account, yet a person may well be entitled to an account and yet not be a partner. If he is to receive a sum equal to a share of the profits, he is, by the great weight of authority, clearly no partner; yet how can he secure the payment of the compensation agreed upon unless he has an account? See, also, 2 Am. Law Review, 199. The argument, that the sharer of the net profits will otherwise receive usurious interest without risk, does not seem very forcible. Usury is punished by the refusal of the law to enforce usurious contracts, or by the imposition of penalties; but it is not customary to punish usury by compelling parties to perform contracts which they never made. The only other alleged reason deserving special consideration at this time is, that the net-profit rule is necessary to "protect third persons against the frauds which might be practiced, if secret agreements were allowed to be binding on third persons." See BELL, J., in Bromley v. Elliot, 38 N. H. 287, 303. It is conceded on all hands that, so far as the agreement is known, it must be binding on all who have knowledge of it-id., and see 2 Am. Law Review, 7, 8, 202; but it is urged that to allow force and validity to a secret agreement would often work a fraud on third persons. In this view, the liability of the sharer of net profits depends solely upon the secrecy of the agreement. What are the probable frauds which cannot be remedied save by holding the secret stipulator for a share of the net profits liable to pay the entire debts of the concern, in direct contravention of an agreement that he shall not be so liable? If his failure to disclose Eastman v. Clark. the agreement has caused persons dealing with the firm to entertain a reasonable belief in the existence of a certain state of facts, and to act on that belief, he cannot now be permitted to controvert, to the prejudice of such persons, the existence of such facts. If, for instance, A allows B to hold himself out as the sole owner of a stock in trade, and to gain credit thereby, an attachment of that stock in trade by a creditor of B will not be defeated by proof that the stock was furnished by A, under a secret agreement between A and B that it should remain A's property. Having knowingly allowed B to gain credit on the faith of his ownership of the stock, A cannot now, as against those who have given B credit, deny that B is the owner. See Elliot v. Stevens, 38 N. H. 311; Kelly v. Scott, 49 N. Y. 595. The receipt of net profits, while any debts of the concern remain unpaid, seems almost or quite an impossibility; but if a person, entitled only to share in net profits, gets hold, by accident or design, of part of the gross returns, he must of course refund them if needed to pay debts; for his own agreement does not authorize him to receive any dividend until all the debts are paid. A secret stipulator for a share of the gross returns would not be thus cut off by his own agreement from retaining such funds; but, as already intimated, he would be quite as effectually barred by the application of the principles of es coppel. If A allows B to hold himself out to the world as the sole owner of the gross returns of a business, A cannot withhold a portion of those gross returns from the creditors who were thus led to trust He is estopped from showing a different state of facts from that which his silence induced the creditors to believe in. But the doctrine of equitable estoppel is remedial, not vindictive. The estoppel will not be carried further in any case than is necessary to prevent one party from being injured by his reliance upon the conduct of the other. 2 Smith's Lead. Cases, 5th Am. ed., p. 644. It is enough to put the party misled in the position he would have been in if the representations actively or passively made by the other party had been true in fact. If B has never allowed himself to be held out as personally liable for debts contracted by A, and the creditors of A have had no reason to rely and have not relied on B's security, why should B be estopped from showing that he is not liable? "A is not the agent of B; B has never held him out a such; yet C is entitled, as between himself and B, to say that A is the agent of B! Why is he so entitled, if the fact is not so, and R |