Chancery Division

Ch D

Jessel, M.R.

1880 Feb. 6

Partnership Articles--Power to expel Partner--Arbitration Clause--Charges of Fraud--Common Law Procedure Act, 1854 (17 & 18 Vict. c. 125), s. 11-- Discretion of Court.

Partnership articles between A. and B. provided that, if the business should not be conducted to the satisfaction of B., he should have power to give notice to A. to determine the partnership; the articles also contained an arbitration clause providing that any differences in relation to the partnership should be referred to arbitration. B. having given notice to A. for the partnership to be determined, A. brought an action against B., alleging various charges of fraud, and claiming that the notice should be declared void, and that B. should be restrained from announcing the dissolution of the partnership, whereupon B. moved that the matters in question should be referred to arbitration:--

Held, that the power to give the notice under the articles was exerciseable by B. at his own will and pleasure:

Held, also (A. having, in the judgment of the Court, failed to establish a primâ facie case of fraud), that the matters in question should be referred to arbitration according to the articles.

In a case where fraud is charged, the Court will in general refuse to send the dispute to arbitration if the party charged with the fraud desires a public inquiry. But where the objection to arbitration is by the party charging the fraud, the Court will not necessarily accede to it, and will ever do so unless a primâ facie case of fraud is proved.

Observations of Wickens, V.C., in Willesford v. Watson1, questioned.

Blisset v. Daniel2 and Wood v. Woad3 distinguished.

BY articles of partnership, dated the 4th of October, 1876, and made between the Defendant, W. A. Russell, of the first part, Robert Crawford of the second part, and the Plaintiff, Henry Russell, a brother of the said W. A. Russell, of the third part, it was agreed that the said W. A. Russell, R. Crawford, and Henry Russell, should be and remain partners in business at Manchester and Glasgow for the term of seven years, subject to its sooner determination as thereinafter provided, under the name of Russell Brothers & Crawford.

The articles contained the following clause:

"If at any time

during the said partnership the business thereof shall not be conducted or managed, or the results thereof shall not be to the satisfaction of the said W. A. Russell, it shall be lawful for the said W. A. RusSell to give a notice in writing to the other partners or partner of his desire that the said partnership shall determine, or to leave such notice at or upon some part of the premises in Manchester where the partnership business shall for the time being be carried on, and also by sending such notice as a registered post letter addressed to the said firm at their office in Glasgow, and in such case the partnership shall cease and determine immediately on the expiration of three calendar months from the giving or leaving of such notice."

The articles also contained the following clause: "If, during the continuance of the said partnership or at any time afterwards, any difference shall arise between the said parties in regard to the construction of any of the articles herein contained, or to any decision, act, or thing to be made or done in pursuance thereof or to any other matter or thing relating to the said partnership or the affairs thereof, such difference shall be referred to arbitration" in manner therein provided, "and the award of the arbitrators or their umpire as the case may be shall be final and conclusive between the parties, and the submission or reference to such arbitration may, on the application of either of the parties, be made a rule of Her Majesty's Supreme Court of Judicature in England."

On the 31st of October, 1879, the Defendant, W. A. Russell, served the following notice upon the Plaintiff, and gave a like notice to the Defendant Robert Crawford:--

"To Messrs. Robert Crawfordand Henry Russell.

"I hereby give you notice pursuant to the provision in this behalf contained in our articles of partnership dated the 4th day of October, 1876, that it is my desire that our partnership shall determine immediately on the expiration of three calendar months from the giving or leaving of this notice as in such articles of partnership provided."

On the 10th of December, 1879, the Plaintiff, Henry Russell, commenced his action against the Defendants W. A. Russell and Robert Crawford, making various charges of fraud against the

Defendants Henry Russell and Robert Crawford, and claiming a declaration that the notice of the 31st of October, 1879, was void and of none effect, and that the partnership of Russell Brothers & Crawford was still subsisting for the remainder of the said partnership term of seven years; and for an injunction to restrain the Defendants from publishing any announcement that the partnership had been dissolved.

The Plaintiff's allegations were supported by affidavit.

The charges of fraud contained in the statement of claim were denied by the Defendant W. A. Russell.

The Defendant W. A. Russell subsequently served the Plaintiff with a notice of motion that all matters in difference between the parties, including the matters in question, should be referred to arbitration, according to the provision in the articles, and, except for the purpose of enforcing such order as might be made on the motion, that all further proceedings in the action might be stayed.

Another notice of motion was served by the Plaintiff on both the Defendants that they might be restrained by injunction from advertising, or in any manner publishing or stating, that the partnership had been dissolved pursuant to the notice of the 31st of October, 1879.

Both motions now came on together.

Davey, Q.C., and T. S. Osler, in support of the Plaintiff's motion:--

Although the terms of the arbitration clause in the partnership articles are very wide, yet, when actual fraud is imputed, the Court will, under sect. 11 of the Common Law Procedure Act, 1854, refuse to enforce the reference, and will itself determine the question in dispute.

In Willesford v. Watson4Vice-Chancellor Wickens observes5 that in cases of actual fraud the Court refuses to interfere.

Further, the Defendant W. A. Russell, in exercise of his power under the articles to give notice to the Plaintiff to determine the partnership, has acted capriciously. Such power must always be exercised fairly and on reasonable grounds, and after giving

notice to the person sought to be removed of the grounds upon which it is given. Thus, in Blisset v. Daniel6, where articles of partnership contained a power for the holder of two- thirds or more of the partnership shares to expel any partner by notice under their hands, it was held that the power was not properly exercised without the knowledge and behind the back of the partner who was to be expelled, and without giving him the opportunity of stating his case and of removing any misunderstanding on the part of his co-partners.

Again, in Wood v. Woad7, where the committee of an insurance society had power to exclude any member on giving him notice in writing, it was held that they could not exclude him without giving him an opportunity of being heard. The same principle was followed in Steuart v. Gladstone8.

Chitty, Q.C., and J. Beaumont, for the Defendant W. A. Russell, and

Ince, Q.C., and Langworthy, for the Defendant R. Crawford, were stopped by the Court.

JESSEL, M.R.:--

The arbitration clause in this case is in terms sufficient to cover every dispute having any relation to the transactions between the partners, and it is clearly so expressed as to include the dispute in question. As to that there is no contest whatever. The only point that is in contest is whether it is a case in which the Court, having regard to the discretion given by the 11th section of the Common Law Procedure Act, 1854, ought in the exercise of that discretion to refuse to allow the matters which have been expressly agreed to be referred to arbitration to be so referred.

Now, of course that discretion was given because there might be cases in which it ought to be exercised, but, as a rule, I should say those cases are few and exceptional. As a rule, persons enter into these contracts with the express view of keeping their quarrels from the public eyes, and of avoiding that discussion in public,

which must be a painful one, and which might be an injury even to the successful party to the litigation, and most surely would be to the unsuccessful. If ever I could imagine a case to which that observation would emphatically apply it is the case before me.

The substantial litigants are brothers and partners, and the contest between them has assumed a very unpleasant phase, for the one brother accuses the other in terms both of constructive and of actual fraud, accusations which are denied by the other brother in very indignant terms, shewing to me that it is a case in which it would be most undesirable that these gentlemen should remain in partnership together. Also, it is a case in which it would be most desirable for the reputation, comfort, and happiness of both that these matters should be investigated by some impartial friend in the shape of an arbitrator rather than before a Judge in Court. If, therefore, I am not compelled by the course of judicial decision to say that I ought not to exercise my judicial discretion in saying that this is emphatically a case to be referred to arbitration, I should accede to the motion of the Defendant W. A. Russell, and the only thing which I have now to consider is whether there has been such a judicial construction put upon this clause of the Act of Parliament as to compel me so to exercise my discretion contrary to my opinion.

The only case which has been cited directly bearing upon the point is a case before Vice-Chancellor Wickens of Willesford v. Watson9, in which, although the point was not decided by him because he thought it was a proper case in which to make the order to refer to arbitration, yet he says this10:

"Such orders have been very frequently made by Courts of Law. The construction which these Courts have put on the clause seems to have been that, whenever the agreement to refer covers the question which the action raises, the matter should be referred, even although it is properly one of law, and even though the defendant's case may be properly raiseable in a cross action; in fact, in all cases except where there is a question of actual fraud. In cases of actual fraud the Court refuses to interfere on two grounds: first, because when personal fraud is in issue the case is properly one of publicity, and for a jury; and secondly, because

the parties to a contract can hardly be supposed to have endeavoured to refer to a conventional tribunal any attempt by one of them to cheat the other. But in all other cases the Courts of Law seem to consider that the defendant is entitled to the reference when he once has shewn that the point is one which the plaintiff agreed to refer."

That is not a statement of the Vice-Chancellor's own judgment, but of what he understood to be the practice in the Courts of Law, and it is very singular that the industry of counsel has not furnished me with a decision at law laying down anything of the kind, and I am not at present aware from what source the Vice-Chancellor derived his conclusions.

Different minds are differently affected by a consideration of the same circumstances, but, speaking for myself, I am by no means persuaded that these reasons are sufficient, or that the Courts of Common Law have ever laid down that they are. First of all, is it true that the parties to a contract can hardly be supposed to have endeavoured to refer to an arbitrator an attempt by one of them to cheat the other? I can find no reason for assuming it. A fraudulent man would not desire publicity, but would wish the question to be inquired into before a private tribunal. Nor does it follow that the man who has been defrauded wants publicity. It is an injury to the credit of the firm. It is an injury to the reputation of a man who has been his partner, who may be connected with him not only by the ties of partnership, but, as in the case before me, by nearer and dearer ties. Why should it be necessarily beyond the purview of this contract to refer to an arbitrator questions of account, even when those questions do involve misconduct amounting even to dishonesty on the part of some partner? I do not see it. I do not say that in many cases which I will come to in the second branch of the case before the Court, the Court may not, in the exercise of its discretion, refuse to interfere; but it does not appear to me to follow of necessity that this clause was not intended to apply to all questions, even including questions either imputing moral dishonesty or moral misconduct to one or other of the parties.

I now come to the first ground, where personal fraud is in issue. Though I quite agree it is within the discretion of the Court to

say, where one of the two partners desires it, that a dispute shall not be referred to arbitration, yet I must consider for a moment which of the two partners does desire to exclude arbitration. Does the party charging the fraud desire it, or the party charged with the fraud desire it? Where the party charged with the fraud desires it, I can perfectly understand the Court saying, "I will not refer your character against your will to a private arbitrator." It seems to me in that case it is almost a matter of course to refuse the reference, but I by no means think the same consideration follows when the publicity is desired by the person charging the fraud. His character is not at stake, and the other side may say, "The very object that I have in desiring the arbitration is that the matter shall not become public. It is very easy for you to trump up a charge of fraud against me, and damage my character, by an investigation in public." There is a very old and familiar proverb about throwing plenty of mud, which applies very much to these charges made by members of the same family, or members of the same partnership, against one another in public. It must be an injury, as a rule, to the person charged with fraud to have it published, and I must say that I am by no means satisfied that the mere desire of the person charging the fraud is sufficient reason for the Court refusing to send the case to arbitration.

It may be that that must depend upon the circumstances of the case, not forgetting both the evidence before the Court when the motion is made, and the nature of the charge that is actually made. But I for one do not wish to countenance the doctrine that the mere fact of a partner, who has a contract in a deed to refer partnership disputes to arbitration, making a charge of fraud against a co-partner, is sufficient to prevent the co-partner insisting upon a reference to arbitration. As I conceive it, that rule ought only to be applied, as a matter of course, without investigating the circumstances, in cases where the person charged with the fraud desires the inquiry to be public.

I will now consider the circumstances of this case, and whether I ought to refuse to interfere. In the first place, I must clear away a point of law which was raised, and which appears to me not to apply to the present case.

The case of Blisset v. Daniel11 has been cited and commented upon, and also a case of Wood v. Woad12. With regard to Blisset v. Daniel I have known it for years, but with regard to Wood v. Woad, I am sorry to say that my acquaintance with it has begun to-day. I must say it contains a very valuable statement by the Lord Chief Baron as to his view of the mode of administering justice by persons other than Judges who have judicial functions to perform, which I should have been very glad to have had before me in both of those club cases that I recently heard, namely, the case of Fisher v. Keane13, and the case of Labouchere v. Earl of Wharncliffe14. The passage I mean is this, referring to a committee 15: "They are bound, in the exercise of their functions, by the rule expressed in the maxim, audi alteram partem, that no man shall be condemned to consequences resulting from alleged misconduct unheard and without having the opportunity of making his defence.

Now one must consider what Wood v. Woad was, to shew how different it is from this case. Wood v. Woad was in effect this: there was a rule which allowed a committee of a mutual insurance society to expel a member, and the ground was, "that if the committee shall at any time deem the conduct of any member suspicious, or that such member is for any other reason unworthy of remaining in this society, they shall have full power to exclude such member." Consequently by excluding him the committee declare to the world, to all his neighbours and friends, and to all the other members of the society in particular, that they "deem" his conduct suspicious, and for some reason that he

is unworthy to remain in the society. By the very act of excluding him they cast a stigma upon him. Then, remembering that, I have to say a word as to the use of the word "deem." That word has more than one meaning, but one of its meanings is to adjudge or decide. In fact, the old word "deemster" or "dempster" was the name for judge. To "deem" at one time meant to decide judicially. Consequently, taking that meaning, what they had to do was to "deem" that the member's conduct was suspicious, and such as made him unworthy. That was in fact a decision not merely depending upon opinion, but depending on inquiry. No one could suppose it was to be left to the caprice of the members of the committee to stigmatise as dishonourable or dishonest any member of the society. Of course it was not. It was intended that they should be satisfied by something like reasonable evidence that his conduct was unworthy. Therefore, in construing the rule, the Court of Exchequer came to the conclusion, and, if I may say so, I think rightly came to the conclusion, that it was a case in which the committee ought not to have decided until after inquiry. That case, therefore, has no bearing upon the question as regards the partnership right to give notice to one partner to dissolve. It is a case of a totally different kind.

As regards Blisset v. Daniel16, that was a very peculiar case. The case there was this: a majority of the partners consisting of two-thirds wished to expel a partner, and nothing more, but if they did expel him, the other partners had a right to buy up his shares in a particular way by valuation. All the Vice-Chancellor decided was this, that in a case of that kind they had no right to expel merely for the purpose of buying up the shares, and that it was not a fair and bonâ fide exercise of the power. He decided that the partners were not to meet together and say, "We should like to have so-and-so's shares, and, therefore, we will expel him." That was a consequence of the expulsion, but it was not to be the motive of the expulsion--it was not a bonâ fide exercise of the power. Then they alleged that they had grounds of dissatisfaction with the partner, but his reply in effect was, "If you have any ground of dissatisfaction you ought to have given me notice to see if I had anything to answer."

There the Vice-Chancellor was of opinion that even in that

limited case, where it was only inter se as regards the partners themselves, yet, if the reason, as far as the other partners were concerned, was misconduct, they ought to give the partner sought to be expelled an opportunity of explaining his alleged misconduct. How that case applies to the case of a single partner I do not well understand. In the case of several partners it may well be that it is a thing to be considered, but if it is a single partner it is plain that neither Blisset v. Daniel17 nor Wood v. Woad18 has any application, because the moment you give the power to a single partner in terms which shew that he is to be sole judge for himself, not to acquire a benefit, but to dissolve the partnership, then he may exercise that discretion capriciously, and there is no obligation upon him to act as a tribunal, or to state the grounds on which he decides for himself.

It appears to me, upon examining these clauses, that this is clearly a power which may be exercised capriciously if one single partner thinks fit. The sole ground of the other decisions, that it was a power given to a number of persons not to be exercised capriciously, of course disappears when you have a power given to a single person which could be exercised capriciously.

The words of the power are in these terms: "If at any time during the said partnership the business thereof shall not be conducted or managed, or the results thereof shall not be to the satisfaction of the said W. A. Russell, it shall be lawful for the said W. A. Russell to give a three months' notice in writing." That is not a question of personal character or conduct in which he can summon a person to explain. It is not, "If the conduct of the said Henry Russell shall not be satisfactory," but it is simply, "If the business shall not be managed or conducted, or the results thereof shall not be to the satisfaction of the said W. A. Russell ." The "results" mean this: there may be a very large profit, but he may not think it large enough, and the result may not be satisfactory to him. How can anybody say that that is anything but a capricious power, that is, a power which he may exercise at his own will and pleasure?

The allegation in the statement of claim is, that there has been nothing in the management or the results which would be otherwise than satisfactory. How can I tell that? That depends on the

state of the man's mind. Some men are never satisfied, nothing will satisfy them. It would be no answer to say that he ought to be satisfied because they had got 40 or 50 per cent. profit. He might say, "That is not enough, I want more." It id plainly a power which puts it entirely within the right of W. A. Russell to say, "I am not satisfied, although all the world except myself would be satisfied with such a result." In other words, it is a power which he may exercise at his will and pleasure, capriciously or not capriciously, as he thinks fit, and to my mind the cases cited have not any bearing whatever. He need not make any inquiry. He need not call upon the partners for explanation; it is open to him to say, "I am not satisfied"; and there is an end of it.

Then I come to the allegations of fraud, and I am very sorry to see that they were made.

[His Lordship then considered the allegations in the statement of claim, which he considered to be allegations of actual personal fraud.]

The next question I have to consider is, what foundation there is for the charges, because, if the mere making of a charge of fraud would entitle the person making it to call upon the Court, in the exercise of its discretion, to refuse to refer to arbitration, there would be a very easy way of getting rid of all these clauses of arbitration. I am satisfied that the mere making of a charge will not do that, even in a case where the Court ought to exercise its discretion by refusing to refer the case to arbitration. There must be sufficient primâ facie evidence of fraud, not conclusive or final evidence, because it is not the trial of the action, but sufficient primâ facie evidence.

Now I am very sorry to say, although this is an accusation brought by one brother against the other, I can find no evidence at all, but there is an affidavit by the Plaintiff stating the circumstances I have mentioned together with some others, and then winding up with that which is not evidence, but which is statement of belief, sufficient on a motion of this kind to call upon the party for a denial, but useless for any other purpose.

[His Lordship, after referring to the affidavits on both sides, continued:--]

Consequently the fraud is not proved, and there is no primâ

facie proof of it, and I myself do not consider the other circumstances stated in the affidavit amount to any evidence whatever of the fraud which is alleged in the statement of claim as a ground for relief and for setting aside the notice which has been given by the Defendant W. A. Russell.

I consider, therefore, that whether or not there may be a case in which, at the instance of the person charging fraud, the Court can properly refuse to refer the matter to arbitration, there is no such primâ facie case of fraud made out as ought to influence the Court, and therefore I think I ought to grant the Defendant's motion.

The order will be, that the Plaintiff's motion for an injunction be refused: the costs of the motions to be costs in the action: the action and the costs, and all matters in dispute, to go to arbitration.

Representation

Solicitors for Plaintiff: Field, Roscoe, & Co., agents for Atkinson, Saunders, & Co., Manchester.

Solicitors for Defendants: Learoyd, Learoyd, & Peace .