Scottish Court of Session Decisions

In December 1902 Charles Fyfe Wilson, a gas-engine and oil-engine manufacturer in Aberdeen, carrying on business under the firm name of C. F. Wilson & Company, advertised for a partner, specifying in the advertisement the amount of capital which the new partner would require to bring into the business, viz., about £2500. James Lewis Ferguson replied to the advertisement, and after negotiations between Mr Ferguson and his father on the one side and Mr Wilson on the other a minute of agreement between the parties was signed and a draft contract initialled on 27th January 1903.

In June 1903 Mr Ferguson raised an action against Mr Wilson concluding for the reduction of the minute of agreement and the draft contract.

The pursuer pleaded—“The pursuer having been induced to sign the said minute of agreement and initial the said draft contract of copartnery—(1) Under essential error; (2) Under essential error induced by the defender; (3) Under essential error induced by the false and fraudulent representations of the defender—is entitled to have the same reduced.”

The defender pleaded—“(1) No relevant case. (2) The averments of the pursuer, so far as material, being unfounded in fact, the defender is entitled to absolvitor with expenses.”

A proof was led.

The facts leading up to the contract are stated in detail in the opinion of the Lord Ordinary ( Kyllachy).

Page: 602↓

On 31st December 1903 the Lord Ordinary reduced, decerned, and declared in terms of the conclusions of the summons.

Opinion.—“I have considered this case with a good deal of anxiety, because it touches, if it does not raise, some legal questions of delicacy, and may also in some views involve questions of character. The action is brought to reduce an agreement of partnership into which the pursuer was, as he alleges, induced to enter under essential error induced by misrepresentation. And the error alleged is, in the first place, with reference to the legal effect of the agreement, which the pursuer says he subscribed on the footing that it was merely provisional, and in the next place, with reference to the history and position of the business, which has, it is said, been found to be essentially different from what was represented.

I may say at once on the first point that I think it quite possible that the pursuer and also his father were in fact under a misapprehension as to the footing on which the agreement was signed, and the relative draft contract of copartnery initialled. But I can find no ground for holding that there was on this matter any misrepresentation by the defender, or by his agent, or that they or either of them were responsible for such misunderstanding as may have occurred. The two documents are quite explicit, and the relation between them is quite plain; and I incline to think that the misapprehension, if it existed, was due really to this, that the pursuer had the idea that because the contract was not to be executed until stock was taken and the amount of the defender's capital ascertained, the same thing applied to the agreement by which the partnership was constitued as from its date.

I may say also that, making the usual allowance for colour and inaccurate recollection, I see no ground to impute to the testimony on either side want of veracity or even candour. In particular, I formed the impression that the defender gave his evidence as to matters of fact fairly and candidly. Indeed, putting aside certain discrepancies as to what passed at the signing of the agreement, there is substantially no conflict between the parties as to matters of fact.

But having all this in view I have felt unable to resist the conclusion that the pursuers subscribed the agreement under error—error which was in the circumstances essential; and, further, that this error was induced by representations made by the defender with respect to the history and position of the business—representations which were contrary to the fact.

The representations which induced the contract, and which I think were in the circumstances essential, were, I think it is proved, these: The defender at the first interview with the pursuer on 10th January 1903 informed the latter in conversation that the business was not only profitable but was increasing; that it was ‘booming and bursting to get out,’ and that the current year was or would be the best the defender had ever had. That, I think, is established. Subsequently on the same day the pursuer obtained from the defender's agent, and took away with him, copies of the last two balance-sheets of the business—the one covering the two years 1899 and 1900, and the other covering substantially the year 1901. The balance-sheet for the year 1902 had not yet been made up, but it fell to be so early in February, so that the year to which it applied if not closed was on the eve of being so. The balance-sheet for the two years 1899 and 1900 shewed a profit of £1173, or £586 per annum. The balance-sheet for 1901, however, shewed a profit of only £462. The pursuer's father, who was advising and finding the required capital for the pursuer, on examination of the balance-sheets, at once saw that on the above figures the business was not progressive, and also that when the profit of the last year was reduced by interest on capital, it left, as he expressed it, ‘no living for two partners.’ Considering this as prohibitory, he at the meeting between himself and the pursuer and the defender on 17th January pointed out this difficulty to the defender, when the latter's reply was (1) that in the last year there had been a loss in winding up and selling off the stock of a certain branch of the business, viz., the agricultural implement branch, which had been given up in May 1901; and (2) that having that in view, the business was in fact progressive, and that, as mentioned to the pursuer, the current year—the year just closing—was the best year he ever had, and would shew the largest profit he had ever had. I think it must be taken that he also added that the profit would be at least £600, or that he would be much surprised if it was not at least £600. In short, I think it must be taken that the defender, by way of meeting the pursuer's father's difficulty, represented that, notwithstanding the apparent decline in the year 1901, the business was not only profitable but progressive—progressive both as regards volume, and as regards profit; and that in particular the current year—the year almost closed—was the best year he had ever had. It was on the faith of this statement that the pursuer's father withdrew his objection and the matter was allowed to proceed.

Now, assuming these representations to have been untrue, it cannot, in my opinion, be doubted that they related to a matter which was essential—essential not only in itself but recognised as essential by the parties. A growing and profitable business is one thing, a backgoing and unprofitable business is for the purposes of a contract of partnership another thing; and that the pursuer and his father so thought, and made it quite plain they did so, appears sufficiently from what I have stated. Nor will it do to say that the matter was not one of fact but of expectation and belief. For in the first place I think it is plain, both on the evidence and on the record,

Page: 603↓

that the defender's statement that the business was an increasing business (increasing that is to say both as regards volume and as regards profit) was made without qualification and as a statement of fact. Moreover, it seems to me that when a statement is made by the owner of a business with respect to the business done and the profits made in a year which is just closing, he must be held to be speaking from ‘book,’ from data before him, and not merely from general expectation and without knowledge.

The question accordingly is whether the representations made were untrue—not merely untrue in the sense of being inaccurate and perhaps loose, but in the sense of being untrue in substance and fact.

Now as to this, the broad facts seem to be these:—Taking the business as a whole, and taking the whole period embraced in the balance-sheets, the turn-over in each year was as follows:—

1899	£5846	£9804.
1900,	3958
1901,	4345
1902,	2859.

Again, excluding the agricultural implement business, which as I have said was (at least for the most part) given up in May of 1901. the fieures were roundly these:—

1899	£5500 (£2750 per annum).
1900
1901,	£2508.
1902,	£2730.

On the other hand, the profits, as brought out by the balance-sheets prepared by the defender or his clerks, including the balance-sheet prepared with the pursuer's assistance in February 1903 were as follows:—

Profit,	1899	£1173, 7s.
	1900
Do.,	1901,	£ 462, 19s. 9d.
Loss.	1902,	£300, 8s. 9d.

Or correcting the three balance-sheets by

(1) distributing equally over the three periods certain legal expenses amounting to £282 mentioned in the proceedings;

(2) placing back to the debit of the year

1901 a sum of £183 borrowed in that year from Mr Laing, but omitted to be had in view in the 1901 balance-sheet; and (3) placing against the profits of each year, inter alia, interest on borrowed capital and discount on bills, the true figures would be as nearly as possible these:—

Profit	1899	£1173
	1900
		108
		——£1065.
	1901,	£462
		311
		——£ 151
Loss,	1902, (about)	£ 200.

It is true that the pursuer's accountant brings out a loss on the year 1902 of, in round numbers, £517, while on the other hand the defender's accountant brings out a profit of £21. But the pursuer's figure is reached (I think questionably) (1) by charging against the year in question £240 of the £282 of legal expenses above mentioned, and (2) by charging also against the same year a sum of £144 for depreciation; while on the other hand the defender's figure is brought out by debiting (I think erroneously) to capital (1) the whole £282 of legal expenses, and (2) a further sum of £94 made up of discounts and losses on returns during the year. These figures, however, are not in this matter essential, and on the best consideration I have been able to give to the matter, it appears to me that in taking the loss of the last year at the sum I have stated, viz., £200, I have dealt not unfairly by the defender. Nor, I may add, do I think it possible materially to affect this result by importing, as proposed by the defender, into the accounts for the year 1902 a calculated profit (45 per cent.) on work in progress, and more or less nearly completed in February 1903. It is true that the valuation of work in progress at February 1903 was £1613, while the work in progress in February 1902 had been only £827, the figures applicable to engines alone being respectively £1220 and £635. But in the first place the difference as regards (practically) finished work did not, as I make out, exceed about £232. (Four engines at £58—£232.) And in the next place there are no means of estimating the difference as between the two periods in respect of work not merely in progress but sold or ordered. It appears to me that (assuming the introduction of this matter to be at all legitimate) it is only the latter comparison that can here be of any importance.

On the-whole matter, therefore, I think the pursuer has proved that he signed the agreement in question under essential error induced by misrepresentation. And, holding this to be sufficient, I do not find it necessary to consider whether the misrepresentations were either in the moral or the legal sense fraudulent. That would I think, depend on the question whether fraud (at all events in the legal sense) can be affirmed where representations are made which are not known to be false, but are yet not known to be true, or believed to be true upon reasonable grounds. For my impression I confess is, not that the defender knew the facts and misstated them, but that believing strongly in the future of his business, and having in no way applied his mind to the matter upon which he spoke, he spoke rashly and without knowledge, and did so knowing, or being bound to know, that he would be understood as speaking from actual knowledge. But taking the view which I take, it is not, as I have said, necessary to decide that question. I consider, as I have already indicated, that the error which induced this contract was, considering the nature of the contract, essential error—error perhaps sufficient, if mutual, per se to rescind the contract, but certainly sufficient to do so both according to our law and the law of England if induced by misrepresentation—misrepresentation even in the moral sense innocent. The authorities on the subject will be found collected and considered in the comparatively recent case of Wood v. Tulloch, March 7, 1893, 20 R. 477, 30 S.L.R. 497. It appears to me that, if I

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am right upon the facts, the decision at which I have arrived is entirely consistent with the authorities.”

The defender reclaimed, and argued—The pursuer had failed to discharge the onus laid on him. Before the pursuer could succeed he must prove either of two grounds of rescission—(1) Fraud on the part of the defender, or (2) misrepresentation of existing facts which were material to the contract and which were made by the defender without caring whether they were true or false— Bellairs v. Tucker, 1884, 13 Q.B.D. 562, opinion of Denman, J., 574.; Derry v. Peek, 1889, 14 App Cas 337 opinion of Lord Bramwell, 350. The pursuer had not succeeded in proving either of these grounds. The fact that the defender took an unreasonably favourable view of the prospects of his business was not a ground for reduction. The pursuers' case was based not on misrepresentation of fact but misrepresentation of opinion. He attempted to introduce a warranty into a contract where none existed.

Argued for the pursuer and respondent—The decision of the Lord Ordinary was sound. In an action of damages on the ground of fraudulent representation, such as Dunnett v. Mitchell, December 7, 1887, 15 R. 131, 25 S.L.R. 124, or in action, of deceit, such as Derry v. Peek, supra, fraud required to be proved. But where rescission of the contract was alone sought a pursuer required to prove only misrepresentation of fact in order to succeed— Adam v. Newbigging, 1888, 13 App. Cas. 308. The pursuer here had proved that he had signed the agreement under essential error induced by the defender's misrepresentation of matters of fact. That was enough for the decision of the case in his favour.

At advising—