Scottish Court of Session Decisions

The Farmers' Mart, Limited, Brechin, pursuers, brought an action of accounting and for payment against John Milne, auctioneer, Brechin, defender, under an agreement dated 9th April 1907, by which the defender was appointed manager of pursuers' business. The agreement in question contained, inter alia, the following clause:—“ Fifth. The second party shall be entitled, but shall not be bound, to undertake any factorship or trusteeship on, or other office involving the management of, any estate, provided always that before undertaking any such factorship, trusteeship, or office he shall first obtain the consent of the first parties, unless in the case of a testamentary or other gratuitous trusteeship, executorship, or factorship, any of which he shall be entitled to accept without the consent of the first parties. The fees or other remuneration derived by the second party from any such factorship, trusteeship, or office as aforesaid, accepted by the second party after the commencement of this agreement, shall (after deduction therefrom of all charges and other out-of-pocket expenses incurred by the second party in connection therewith, and that whether by way of legal, clerical, or other assistance or otherwise) be pooled with all fees and commissions, including fees for measurements, derived by the first parties from any sales or valuations in connection with any such estate under the management of the second party as aforesaid, and the proceeds thereof shall be divided in the proportion of one-half to the first parties and the other half to the second party, provided always that before any such division shall take place there shall out of said proceeds be paid to the first parties the balance of any debt remaining due to them from such estate after giving credit for all sums received or falling to be received on account of such debt, and that whether from the principal or any subsidiary or collateral obligant therefor, or from the respective estate of any such obligants.…”

The pursuers pleaded, inter alia—“(1) The defender being bound under and in terms of the said agreement of 9th April 1907, and in particular article fifth thereof, to account to the pursuers for all fees or other remuneration derived by him ( a) from his said trusteeship on the trust estate of the said John Fair weather, and ( b) in connection with the office of factor, trustee, or other office involving the management of any other estate undertaken by the defender during the period up to 19th August 1908, the pursuers are entitled to decree of accounting as concluded for, and on the balances due to the pursuers being ascertained in terms of said agreement they are entitled to decree for the same.”

The defender pleaded, inter alia—“(1) The averments of the pursuers being irrelevant and insufficient to support the conclusions of the summons, the defender is entitled to decree of absolvitor. (3) The agreement founded upon by the pursuers being void in respect it is corrupt and illegal, the pursuers cannot maintain the present action, and the same ought to be dismissed.”

The facts of the case appear from the opinion of the Lord Ordinary ( Hunter), who on 29th October 1913 repelled the first and third pleas-in-law for the defender and ordained him to lodge an account.

Opinion.—“The pursuers are a limited company and carry on business as live stock salesmen, agents, auctioneers, appraisers, and land surveyors in Brechin and elsewhere. The defender was manager of their business from 20th August 1899 until 19th August 1908. The action concludes— First, for an accounting of all fees or other remuneration derived by the defender prior to 19th August 1908 in connection with the office of trustee under the trust-deed for behoof of creditors granted by John Fairweather, farmer, Langhaugh, by Brechin, in defender's favour and dated 14th June 1907; and Second, for an accounting by the defender of all fees or other remuneration derived by the defender as trustee upon any estates other than Mr Fairweather's; with conclusions for payment of money alleged to be due in respect of such accounting. In terms of an agreement dated 9th April 1907, the defender was appointed manager of the whole business of the pursuers. He was to be entitled to engage in farming, but otherwise he was to devote his whole time to the management of the pursuers' business. By the fifth article of the agreement it was provided that the defender should be entitled, on obtaining the pursuers' consent, to undertake any factorship or trusteeship—the fees or other remuneration derived by the defender from such office to be pooled with all fees and commissions, including fees for measurements, derived by the pursuers from any sales or valuations in connection with any estate under the defender's management, ‘and the proceeds thereof to be divided in the proportion of one-half to the first party and the other half to the second party, provided always that before any such division shall take place there shall, out of said proceeds, be paid to the first parties the balance of any debt remaining due to them from such estate after giving credit for all sums received or falling to be received on account of such debt, and that whether from the principal or any subsidiary or collateral obligant therefor, or from the respective estate of any such obligants.’

On 19th August 1908 the agreement between the pursuers and the defender was terminated by three months' notice by the pursuers, and in terms of the second article thereof. Prior to the termination of his agreement the defender admittedly acted as trustee upon Mr Fairweather's and other estates. He declined, however, to account to the pursuers in terms of his agreement for the fees and remuneration received by him, upon the ground that the agreement to which he himself was a party is corrupt and illegal. The grounds upon which he maintains this position are thus

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stated in his answers 2 and 3:—‘ The said fifth clause is void in respect that it provides ( a) that the fees or other remuneration derived by the defender as the second party thereunder from any factorship, trusteeship, or office held by him should be pooled with all fees and commissions, including fees for measurements, derived by the pursuers as first parties thereunder in connection with any estate under the management of the defender, and divided equally between them, after making certain deductions therefrom; and ( b) that the parties thereto bound themselves thereby to allow the debts due to the pursuers on such estates to be a first charge against the fees or other remuneration payable to the defender as trustee or factor thereon. It is against public policy that the pursuers should bargain for a share of the fees or other remuneration earned by the defender as a trustee under the Bankruptcy (Scotland) Act 1856, or otherwise, or that as creditors on bankrupt or insolvent estates the pursuers should secretly contrive to place themselves in a more favourable position pecuniarily than the general body of creditors by such a bargain with the defender as trustee or factor thereon. Further, the provision in the said agreement that the fees and commissions, &c., paid by estates upon which the defender is trustee should be equally divided between him and the pursuers is fraudulent. This latter provision was inserted in the said agreement for the purpose of inducing the defender, in his capacity as a trustee for creditors or for other beneficiaries, to employ the pursuers in connection with the business or affairs of the estates on which the defender was trustee, upon the footing that, unknown to his constituents, he should receive from the pursuers one-half of their fees and commissions chargeable against such estates.’

In support of his case defender's counsel referred me to several cases. In Laughland v. Millar, Laughland, & Company, 1904, 6 F. 413, one of the directors of a company entered into an agreement with the managers of the company that if they received a bonus of £700 from the company on the sale of its business he should receive £200 from them. The contract was held to be illegal, and the managers were assoilzied in an action for the £200 raised against them by the director. The ground of that decision was that the managers and the director had entered into a combination to get into their possession a sum of money belonging to the shareholders, and in the evidence given by the director he admitted that but for the agreement he would have done what it was his duty to do, i.e., he would have had the £700 divided among the shareholders. In Harrington, 1878, 3 QBD 549, it was decided, as put by Cockburn (C.-J.), ‘that when a bribe is given, or a promise of a bribe is made, to a person in the employ of another by some one who has contracted or is about to contract with the employer, with a view to inducing the person employed to act otherwise than with loyalty and fidelity to his employer, the agreement is a corrupt one, and is not enforceable at law, whatever the actual effect produced on the mind of the person bribed may be.’ The defender's counsel founded strongly on the case of M'Gowan, 13th December 1808, F.C., where it was held that a bargain by a competitor for the office of trusteeship upon a bankrupt estate to hand over a proportion of his commission as trustee to other competitors was corrupt.

I have not been able to satisfy myself that the decision in any of the cases to which I was referred would justify me in dismissing the action as I was asked to do by the defender's counsel. As regards the pooling arrangement, I do not see that there is anything corrupt in the manager of a business arranging for his remuneration as trustee being shared by the members of the firm whose business he manages. It is quite a usual arrangement that one of the partners in a law agent's or an accountant's business should communicate the fees earned by himself individually for discharging such duties as those of trustee on a sequestrated estate. If a partner may so communicate his fees I do not see why the manager of a business may not make a similar arrangement. What is communicated are fees actually earned, and the agreement entered into does not involve any failure of duty on the part of the trustee towards those whose interests he must protect. It is maintained, however, for the defender that the arrangement between the parties in this case enables the pursuers to get an undue preference over the other creditors of a bankrupt. The stipulations as to the pursuers receiving payment in full of any debt due to them by the bankrupt out of the fees of the defender as trustee appears to me to be an unfortunate condition, but I have not been able to satisfy myself that it is corrupt or of such a character as to justify me in sustaining the defender's plea to the effect of wholly disregarding the agreement between the parties. The creditors on the estate have not in any way suffered, and I do not think there is anything illegal in one creditor receiving more than the others as long as he does not receive a preference out of the bankrupt estate, on which all ought to rank equally. As regards the provision that the pursuers are to pool fees received by them for measurement work with the fees earned by the defender as trustee, I do not think that the averments are of such a character as to justify my holding that the whole agreement is illegal, and the defender freed from the obligations under which he has voluntarily come. It may be that as regards certain of the fees pooled it may be established that there was an improper stipulation which renders it against public policy to give effect to the provisions of the agreement; but I do not think that on a mere construction of the terms used I should be justified in sustaining without inquiry a plea which would free the defender from obligations deliberately undertaken by him. I shall therefore meantime order an account by the defender—a course which will allow him, if he can, to state and prove any illegality in connection with any of the particular items in the accounting.”

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The defender reclaimed, and argued—The agreement founded on by the pursuers was corrupt and illegal, and was therefore void. The class of illegal contracts under which it fell was that of matters affecting the particular duties of individuals whose duties were of public importance—Pollock on Contracts (8th ed.), p. 288. Under the agreement the defender might be placed in a position where his interest conflicted with his duty, and it was sufficient if he might. The Court would not enforce such an agreement—Goudy on Bankruptcy (3rd ed.), pp. 244, 365; MacGown v. Tod, December 13, 1808, F.C.; M'Taggart's Representatives v. Roberton, January 25, 1834, 12 S. 338; Mann v. Dickson, July 1, 1857, 19 D. 942. The case of a law agent benefiting indirectly by his position as judicial factor was different— Sleigh v. Sleigh's Judicial Factor, 1908 S.C. 1112, 45 S.L.R. 826. The case of Thwaites v. Coulthwaite, [1896] 1 Ch 496, founded on by the pursuers, differed from the present in that in that case there was nothing wrong in the contract itself but only in the means. Further, the agreement to pool fees was, under the Prevention of Corruption Act 1906 (6 Edw. VII, cap. 34), sec. 1 (1), (2), a criminal offence— Graham v. Hart, 1908 S.C. (J.) 26, 45 S.L.R. 332; Bewdley Election Petition, 1869, 19 L.T. 676, per Blackburn, J., at p. 678; Harrington v. Victoria Graving Dock Company, 1878, 3 QBD 549; Shipway v. Broadwood, [1899] 1 QB 369; Hovenden & Sons v. Millhoff, 1900, 83 L.T. 41; Laughland v. Millar, Laughland, & Company, February 19, 1904, 6 F. 413, and per Lord M'Laren at p. 417, 41 S.L.R. 325. If the Court was satisfied that the agreement is illegal, it would not enforce it— Scott v. Brown, Doering, M'Nab, & Company, [1892] 2 QB 724; North-Western Salt Company, Limited v. Electrolytic Alkali Company, Limited, [1913] 3 KB 422.

Argued for the pursuers—The defender's argument would carry the doctrine of refusing implement to contracts on the ground that they were contrary to public policy, far beyond anything yet established—Pollock on Contracts (8th ed.), p. 332, side-note. The class of contracts thus struck at was very narrow, and would not be extended without clear necessity— Printing and Numerical Registering Company v. Sampson, 1875, 19 Eq. 462. If there were two ways of carrying out a contract, one legal and the other illegal, the Court would read the contract in the sense which allowed the contract to stand, and would presume that the parties meant to contract on that footing— Thwaites v. Coulthwaite ( cit. sup.). The defender under the present agreement was not bound to take up any trusteeship, nor to employ the pursuers under any he took up. The only ground for saying that the present agreement was corrupt was that in certain events there might possibly be injury to creditors, but that could not happen in the present case, because the fees had actually been earned, and in any event to put parties in a position of temptation was not corrupt. The cases of Graham v. Hart ( cit. sup.) and Shipway v. Broadwood ( cit. sup.) were cases of bribery and not in point. The case of Laughland v. Millar, Laughland, & Company ( cit. sup.) was a case of a particular corrupt transaction, while the present was a general contract. In MacGown v. Tod ( cit. sup.), M'Taggart's Representatives v. Robertson ( cit. sup.), and Mann v. Dickson ( cit. sup.), there were corrupt bargains to employ which did not exist in the present case.

At advising—