The National Exchange Company of Glasgow v. Peter Drew & Mathew Dick [1855] UKHL 2_Macqueen_103

UKHL
The National Exchange Company of Glasgow v. Peter Drew & Mathew Dick
[1855] UKHL 2_Macqueen_103 · 1848-08-14
Reports of Cases Argued and Determined in The House of Lords.

No. 11

The National Exchange Company of Glasgow, Appellants v. Peter Drew & Mathew Dick, Respondents1855 . 27th February , 1st , 2nd , 5th , & 9th March .

Subject_ Rigging the Market — Fraudulent Representation. —

Fraudulent Reports of Directors—Effect of their Adoption by assembled Shareholders Fraudulent Reports of Directors—Effect of their Adoption by assembled Shareholders .—Statement by the Lord Chancellors and by Lord St. Leonards of the legal obligations which arise from adopting a report made by Directors to an assembly of Shareholders.A tottering Joint Stock Company, with a view to raise its shares in the market, represent the concern as most prosperous, and offer money to two of their shareholders to buy further shares, saying:
“You shall not be called upon for any contribution till the stock can be sold at a profit.”
The shares become valueless; the Company sues for repayment of the money advanced. Defence , that the Company had been guilty of fraud: that defence held good.Objection: That the fraud was not in the loan, but in the representations which induced the purchase. Answer, by the Lord Chancellor: That the transaction was not properly a loan; by Lord Brougham: That he, with difficulty, agreed with the Chancellor; by Lord St. Leonards: That it was a loan, but that the loan and the purchase were one and the same transaction.Objection: That the two shareholders were themselves members of the Company, and, as such, could not complain of a fraud by the Company. Answer by the Lord Chancellor: That by Scotch law, the identity of a shareholder was distinct from that of the Company.Objection: That the fraud was a fraud on the Company, not by the Company. Answer by the Lord Chancellor: That the Company, an abstraction, could only act by its Directors and Managers, and a fraud by them was a fraud by the aggregate body; by Lord Brougham and Lord St. Leonards: That the Company had the benefit of the fraud.Objection: That the representation must not only be false, but known to be false by the party making it. Answer by the Lord Chancellor: That the general interests of society required that representations by Directors should bind the entire corporation, although the individuals composing it might be ignorant of the representation and of its falsehood.

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Pleading in Scotland .—Remarks by the Lords on the state of pleading in Scotland.Per Lord Brougham: A pleading ought not to be rhetorical or metaphorical.Cornfoot v. Ffolkes , 6 Mees. & Wel. 358, explained by the Lord Chancellor and commented on by Lords Brougham and St. Leonards.The summons, dated the 14th August 1848, was by the National Exchange Company of Glasgow, and by certain persons the individual partners of the said Company, for their own right and interest, and on behalf of and as representing the said Company, and the whole other partners thereof; and it stated that Peter Drew and Mathew Dick, the Defenders, having, in or about the month of October 1847, purchased from one or more parties, holders thereof, 240 shares of the stock of the said Company, the said Company advanced and paid for the Defenders' behoof, the purchase money of the said shares; that the sellers, upon receiving the said purchase money, signed the transfers in favour of the Defenders, and the Defenders signed the said transfers on the said 10th day of November 1847, in token of their acceptance thereof; that the said shares had become unsaleable; that for the said cash advances and payments, and for commission and interest thereon, there was due to the Pursuers 618 l . 17 s . 9 d . sterling, of which the Company claimed payment.The plea in law of the Pursuers stated, “that the Defenders being debtors to them in the amount sued for, they ought to be ordained to make payment thereof, with interest and expenses.”

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The pleas in law of the Defenders were,—

1. That in the circumstances above stated, the National Exchange Company were not entitled to make any claim against the Defenders for the advances said to have been made by them in purchasing the shares of the stock in November 1847; and,2. That the Company had acted as brokers for the Defenders in purchasing the stock, and had prevailed upon them to do so by gross fraud, concealment, and misrepresentation.The Lord Ordinary (Lord Ivory ) by his Interlocutor of the 22nd December 1849, found that no sufficient allegations had been made by the Defenders

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But the Lords of the First Division, on the 31st May 1850, recalled the Lord Ordinary's Interlocutor, and remitted the cause in order to have issues prepared.Against this decision of the First Division, the Company appealed to the House of Lords, on the following grounds:—In the first place, that the Defenders; while they admitted the truth of the Pursuers' averments to an extent sufficient to support the conclusions of the action, had not relevantly averred acts sufficient to obviate or repel their legal effect.Secondly, that the Defenders had made no allegations in point of fact sufficient to support, as relevant, their pleas in law.Thirdly, because the allegations of the Defenders related to the conduct of individuals only, and did not affect the Appellants, who constituted the body of the Company; and,Fourthly, because the Appellants, having made advances for the Respondents, were entitled to recover the amount without regard to the motives which might have caused the Respondents to become the purchasers of the shares, the price of which was paid by those advances.Sir Fitzroy Kelly (with whom was Mr. Willes (a) ) for the Appellants: Fraud is not alleged against the Company in the aggregate. The shares were bought through the medium of the Defenders' own brokers. They were not purchased from the Company, but from the shareholders in the course of the public market.The reports alleged to have been deceptive were made not by the Company, but to the Company. The allegations here are vague. They ought to have been specific, so as to go to proof, and admit of being met

Footnote

( a ) Now Mr. Justice Willes.

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So far as principle is concerned, this case is precisely the same as that of Cornfoot v. Ffolkes (d) , where Mr. Baron Rolfe says, that if an agent makes a representation, it must appear that he knew the representation to be false, before the principal can be affected. Here, the fraud is alleged to have been by certain directors, but they are not named, so as to enable us to ascertain whether they knew their representation to be false. Where is it stated that Barlow knew that what he said was false?[ The Lord Chancellor (e) : In Cornfoot v. Ffolkes , the plea was that the Defendant had been induced to enter into the agreement sued on by the fraud and covin of the Plaintiff. The evidence proved nothing to support that plea; for the Plaintiff had merely put the house into the hands of an agent to be let at a

Footnote

( a ) 7 Bell, 186.( b ) 1 House of Lords Ca. 605.( c ) Suprà Suprà . vol. 1, p. 535.( d ) 6 Mee. & Wel. 358. In this remarkable case, the Defendant, Sir William Ffolkes, Bart., being in search of a town residence for the purpose of educating his children, one of them a daughter seventeen years of age, applied to Mr. Clarke, a house agent, who informed him of a house rented at four hundred guineas. Sir William called, and asked, “Pray, is there anything objectionable about the house?” To which Mr. Clarke replied, “Nothing whatever.” Sir William took the house. In a few days he discovered that the adjoining house was a brothel of the worst description, and that families in the neighbourhood of it were obliged to leave their houses, and others who let lodgings were unable to get occupants. Cornfoot, the owner of the house, was fully aware of this; but it did not appear that the agent knew of the objection when he answered the inquiry. Cornfoot neither made the representation, nor knew that it had been made. The Court of Exchequer held (Abinger, C.B., dissenting), that in order to support the defence, it was not enough that the representation turned out to be untrue. It must be proved to have been made fraudulently. The mere knowledge of the owner and the mere representation of the agent, were not sufficient to constitute together a defence. Judgment therefore went for Cornfoot.( e ) Lord Cranworth.

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[ The Lord Brougham : In Cornfoot's case non constat that the employer had not told the agent and desired him to apprize the purchaser. It was the over zeal of the agent for which the principal was not to suffer.]But we contend that this action can be defeated only by showing that the Company committed the fraud alleged. The action is by the Company. The answer is an alleged fraud, not by the Company, but in fact on the Company.The contract here is a contract of loan. The object is to recover back the money lent. Fraud in this contract is not alleged, but in another contract with which the Company had no concern. The fraud averred is that the agent, Barlow, had induced the Defenders to purchase shares. This was done collaterally. The Defenders ought to come on those who deceived them. They do not deny the receipt of the money, but they say, “An agent of yours has deluded us into making an imprudent investment.” It ought to have been alleged and shown that the Company had been guilty of a fraud. In Dodgson's case (a) it is laid down that although directors fraudulently inducing a person to buy shares may be personally liable to him, yet they cannot be considered as the body of shareholders to commit a fraud.[ The Lord Chancellor : The directors here do not appear to have had authority to act as agents of the Company to sell shares.]They cannot certainly be the agents of the Company to commit a fraud.

Footnote

( a ) De Gex & Smale, 85.

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[ The Lord St. Leonards : If you will buy, I will lend you the money.]

Still; such an act legally will not bind the Company. It is not said that the Company lent the money for the purpose of getting the Defenders to buy shares with it:[ The Lord Brougham: If I lend you 40 l ., and advise you to give that sum for a horse not worth 20 l ., am I not to recover back payment of that loan?]The Defenders were themselves members of the Company. The demand should have been against the directors. The case of Dodgson , already cited, is confirmed by the North of England Bank ( Bernard's case )(a) . There it was held that a shareholder was not relieved from his obligations by the inaccurate representation of the manager, however fraudulent. Here, the Plaintiff may have the benefit of the fraud, and yet he can enforce the contract, as in Cornfoot's case. Under Railway Acts, the directors are really the Company, but here this is not so. There is here no contract with the Company, except for the loan of money. The law is well stated by Lord Campbell in a case before the Queen's Bench, Gerhard v. Bates(b) .There must appear to have been authority to make the representation before any principal can be bound by an agent's representation.There is no instance to the contrary on record.[ The Lord St. Leonards : The question is whether this was a separate transaction. Were those who made the loan the same persons as those who induced the purchaser to buy?]Even supposing them one and the same, it would come but to this,—that the Company have, by a false representation of their solvency, induced the Defenders

Footnote

( a ) 5 De Gex & Snfale, 238.( b ) Ellis & Blackstone, 476.

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[ The Lord Brougham : There is the element of the benefit to the Company by the result of the purchase; otherwise the case would have been the same as that of the horse which I put.][ The Lord Chancellor : In short the contract which is the subject-matter of litigation is not the contract in which the fraud occurred.][ The Lord St. Leonards : Here the loan is made for the very purpose of raising the shares.]The loan was legal and unimpeachable; the fraud collateral.[ The Lord Brougham : I have an estate adjoining another, and I tell a man to buy the other for 500 l , and I say to him if he has not the money I will lend him. He buys. The property is not worth 50 l . I however sell my own property at the enhanced value. Would that bar my demand for the repayment of the 500 l .?]Certainly it would not. The cases have never gone so far. In this country there are numerous decisions to the same effect, both at law and in equity. They are all collected by Mr. Smith (a) (beginning with Pasley v. Freeman , and concluding with Ashton v. Taylor ). The law, therefore, is quite clear, and we trust that your Lordships will not, by affirming this decision, disturb it.Mr. Willes , with Sir Fitzroy Kelly: No fraud is attributed to the bulk of the shareholders constituting the Company. Why did not the Defenders, as shareholders, inquire into Barlow's authority? In his misrepresentations he cannot be presumed to have been

Footnote

( a ) 2 Leading Cas. 55.

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[ The Lord Chancellor: I never heard of the phrase “rigging the market.”]

One of several persons borrows money belonging to the whole of them, and embarks with it in a speculation recommended by a person equally employed by all of them. Is the borrower not bound to repay? Can the fraud of the person who acted for all—that is, for the borrower as well as the others—be any answer to the demand? Baron Parke , in Cornfoot's Case, qualifies the doctrine by saying that the fraud must be in making the contract . There is a distinction between fraud by statement and by concealment.

[ The Lord Chancellor : Rather reticence.]

The fraud by the agent must be in the business of his agency and it must be in the contract sued upon. Now, Barlow in making this contract of loan mis-stated nothing. It is in the option of the person defrauded to stand by the contract, but if he acquiesce he will be bound. The alleged dolus will not warrant a claim to set the contract aside, because it is not dolus dans locum contractui .The Solicitor General (a) and Mr. Anderson for the Respondents: The Company divided the brokerage charges with persons named Buchannan and Kerr, as their subordinate agents. The Company, moreover, were themselves actually agents for the Defenders. Again, the report of the directors was adopted by the Company. The payment of the dividend shows this. It is not necessary to establish that the Company were

Footnote

( a ) Sir Richard Bethell.

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[ The Lord Chancellor: What I have seen of Scotch law does not induce me to regard with any regret the superior strictness of English pleadings.]That strictness is confined to the common law tribunals; it does not hold in equity. Sir Lancelot Shadivell did not hesitate to give relief in Stainbank v. Fernley (a) , where the directors of a joint stock company, in order to sell their shares to advantage, represented in their reports and by their agents, that the affairs of the company were very prosperous, when they were, in fact, insolvent. A person who had been induced by those means to purchase shares, filed his bill to be repaid his purchase money, and a demurrer for want of equity was overruled. The two things attempted to be distinguished are really one.In Langridge v. Levy (b) doctrines are laid down which show that the excessive strictness contended for on the other side is not always enforced at common law; and the decision there was affirmed in the Exchequer Chamber.Representations by Directors will bind the Company. This was the precise decision of your Lordships in Burnes v. Pennell (a) . The same principles are adopted by Lord St. Leonards in his concise view of

Footnote

( a ) 9 Sim. 556.( b ) 2 Mee. & Wel. 519.( c ) 2 House of Lords Cas. 497.

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Sir Fitzroy Kelly , in reply: The way in which Cornfoot's case has been dealt with by the Courts shows that the reasoning of the Solicitor General is untenable. That case has never been shaken. On a collateral representation, set up as a defence, you must show it not only to be false, but false to the knowledge of the party making it. Mr. Smith's (e) notes on pasley v. Freeman state the law most accurately. The agent was innocent in Cornfoot's case; so was the principal. Then what are the facts alleged on this record? Are the statements collateral to the contract? If they are, they cannot be relevant, although

Footnote

( a ) P. 178.( b ) 3 Q. B. 58. See Evans v. Collins , 5 Q. B. 804.( c ) 12 Sh. & Dun. 536.( d ) N. S. 907.( e ) Of Mr. Smith's Notes on Leading Cases, Sir Fitzroy Kelly observed that he believed there was not an error to be found in them from beginning to end.

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No question can exist that there were separate brokers, namely, Buchanan and Kerr; but it is said there was a secret understanding that the Company should have a half of the commission, although this is not shown or alleged to have been known to the Defenders. With respect to the suggestion which was thrown out by one of your Lordships(a) that the Court below might order a transfer of the shares back to the Company, and that parties might thus be remitted to their original position, the case of Rawson v. Samuel(b) , before Lord Cottenham , shows that the mere existence of cross demands will not be sufficient to induce a Court of Equity to interfere.Wilde v. Gibson has indeed been found fault with by Lord St. Leonard's (c) ; but it is law. Finally, we submit that the circumstance of the Defenders having been themselves shareholders makes this Case different from all others, and renders it inevitable that this decision must be reversed.Lord Chancellor's opinion.

The Lord Chancellor:

My Lords,this was an action brought in the month of. August 1848, by certain members of the National Exchange Company, of Glasgow, to recover from the

Footnote

( a ) Lord St. Leonards.( b ) Craig & Phil, 161.( c ) Sir Edward Sugden's Law of Property, p. 614.

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My Lords,there is no doubt that the purchase of these shares was made by the Company; that it was made upon the account of the Defenders, and made out of the funds of the Company; and the simple case made by the Pursuers, the now Appellants, is, that this was a loan of money, or in the nature of a loan of money, by them to the Defenders, and that that money has never been repaid; and therefore the Company seek to recover the repayment of that money with interest and certain expenses. Inasmuch as there is no doubt that the advance of money was made, the Case so stated undoubtedly presents a primâ facie primâ facie case on the part of the Pursuers.Defences were put in to this claim, and certain issues were proposed to be tried. Whether those were proper issues, is not the question for your Lordships to decide. The single question upon which the House is called to adjudicate is, whether the Court of Session were right in holding that the statements put in by the Defenders constituted a relevant defence to the Case of the Pursuers.My Lords,the main ground of defence is, that this advance of money was made by the Company under circumstances which disentitled the Pursuers to treat it as having created any debt due to them from the Defenders, for the Defenders aver that shortly previous to the advance, the Company, by their Directors, had fraudulently represented to the Defenders that the affairs of the Company were in a flourishing state, whereas they were really insolvent or nearly so.The Defenders' statements upon that head are, that “at the first annual meeting, held on the 17th

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Next the Defenders say that this fraudulent misrepresentation was a concocted report upon the part of the Company, which induced them to enter into this transaction, into which they would not otherwise have entered. And, secondly, they say that the Company, by their Manager, urged the Defenders to make the purchase, and offered, if they would do so, to advance the money, and to take the shares as a security for the repayment, which they would not enforce till the shares could be sold at a profit.Now the question is, whether a relevant defence is stated. Undoubtedly, if the contract sued on was obtained by fraudulent misrepresentations on the part of the Plaintiffs, no Action can be sustained either in Scotland or in this country, or indeed in any country governed by any known system of law. Certainly, in this country and in Scotland, a contract obtained by fraud may be treated as being no contract at all.The Plaintiffs say, however, that no such case is made, because the fraud, even if there were a fraud on their part, was not a fraud leading to the contract sued on, that is, the loan. They say that the loan

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I must confess this case is one in which my opinion has fluctuated from time to time very much in the course of the arguments; but I have, after much deliberation, come to the conclusion that, quite independently of this statement of fraud, a relevant defence is here stated, which entitles the Defenders to resist the demand, even supposing that there had been no question of Directors, no question of Manager, but that this had been a single suit by a single person carrying on business. I come to that conclusion for this reason: I think that the real result of this statement is, that there was no loan at all. The whole transaction must be stated together. What really took place was this, the Pursuers (I will suppose they were merely two individuals carrying on business in partnership as bankers and as brokers) say to the Defenders, There are certain shares in the market which may be purchased and which are worth 50 s . a share. I will assume it was very much for the interest of the Pursuers that these shares should be purchased—but, whether they made any misrepresentation or not, what they really say to the Defenders upon this statement is this, If you wish to purchase these shares, we have such confidence in their value, that if you like we will as your agents make the purchase, advance the money, take the shares ourselves and hold them, and not call upon you for payment until they can be sold at a profit.

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Now, suppose, there were no other defence than that,—I confess, having turned the thing over and over again in my mind,—I think that is a relevant defence, because, in truth, it negatives the assumption, which has been proceeded on all along, that this was a loan. A loan means, in ordinary parlance, an advance of money upon a contract to repay it at the will of the lender. There was no such contract at all here,

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If I am right in saying that there never was a loan, in the ordinary sense of the word, that there was merely a purchase as agents for the Defenders upon a special contract, to be repaid only in a particular manner, it would seem unnecessary to consider the other matters which have been so elaborately argued. But I should be reluctant to let the case fall through, as it were, upon that summary solution, without explaining to some extent what my views would have been, supposing that the short point I have stated were not of itself a relevant defence.I agree, that in order to vitiate a contract and to make it a nullity by reason of fraud, it must be a fraud according to the language which has been so often quoted, dans locum contractui . That is, if the Pursuers were right in saying that the loan

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Now, that I take to be the law both of Scotland and of England, and I should think of most civilized countries. It was urged by the learned Solicitor General that justice might be done by forcing the contract upon the person who had lent the money. I do not think that would be the correct mode. I know no principle or authority that could enable him to do that. It would be setting off against a liquidated demand something that may be recovered of the nature of unliquidated damages. I think, that not only by the law of England and of Scotland, but by the law of other civilized countries, that cannot be done; the inconvenience of it would be excessive. If a person has an actual liquidated money demand, which he seeks to enforce, the amount undisputed, it would be unjust, or might be unjust to him, to involve him in a question whether the person who is bound to pay him that liquidated sum may or may not have a right of action against him upon some collateral matter in respect of some damage on account of which he may have a right of action, for a fraudulent representation, or for an assault, or for a trespass, or any other of those various wrongs which may be inflicted upon the man, and for

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Again, to attempt to force the lender of the money to take to the purchase, as it is said, might cause the greatest injustice. There might be cases in which that might do justice, but there might be cases in which it would be very unjust. Suppose, for instance, the purchase had been of a much larger quantity, and suppose the person had only borrowed a portion of the money; suppose that, in this case, he had borrowed only 300 l ., is the lender of the money to take to the whole? Neither upon principle nor authority, is there anything to warrant such a course as that.Therefore I am of opinion, that if the loan and the purchase had been independent transactions, I should have agreed with the Appellants, that the dolus was not a dolus dans locum contractui . But, as I have already stated, I think there was no loan independently of the purchase. I think that the transaction cannot be properly described as a loan. The Company wished to induce the Defenders to purchase the shares, and for that purpose they made a fraudulent misrepresentation, under which they offered to make the purchase for them on the terms I have already mentioned. I think that this makes the advance of money not an independent loan, but a part of the machinery for giving effect to the fraud.But then it was said, taking that to be so, still there was no fraud on the part of the Company; the fraud, it was said, was a fraud by the Directors, and

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Now, upon that point I will remark, that the Directors of this Company appear on this record to have had the duty of superintending, directing, managing, and transacting the whole business and concerns of the Company. Part of that duty was to make an annual report as to the state of the concern. I say it was a part of their duty, and they are stated to have done it, as we know it is the invariable custom. I must assume that it was a part of their duty to make annual reports respecting the state of the concern, and, of course, to make correct and honest reports.For the present purpose, I will assume that, in order to raise the value of the shares, the Company fraudulently misrepresented the real state of the concern, the real amount of its assets, and the real amount of the demands upon it. The question is—what is the consequence of the Company receiving such a report (if you can separate the Company from the Directors), and publishing it to the world? I confess that, in my opinion, from the nature of things, and from the exigencies of society, that must be taken, as between the Company and third persons, to be a representation by the Company. The Company, as an abstract being, can represent or do nothing. It can only act by its managers. When, therefore, the Directors, in the discharge of their duty, fraudulently (for I assume this to be so) for the purpose of misleading others as to the state of the concerns of the Company, represent the Company to be in a different state from that in which they know it to be, and the persons to whom the representation is addressed act upon it in the belief that it is true, I cannot think that society can go on

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It was plausibly urged, that these reports were not made by the Company, but to the Company. In form, that is so. No doubt they are reports made to the Company. But I assume, for the present, that they were made to the Company under such circumstances, that what they so report is known and intended to be known, not only to the shareholders, but to all persons who may be minded to become shareholders, just the same as if they were published to the world. I repeat, that I think the exigencies of society demand that the reports so made, and so circulated, should be deemed to be the reports of the Company.It was pressed upon us, that the contrary doctrine had been held in a case decided by your Lordships, of Burnes v. Pennel . To every word of that decision I most entirely agree, as it would be my duty to do even if I did not go along with the reasoning. But I do go along with the reasoning. There the representation was made by a person who knew the subject-matter he was representing, but had no duty to perform towards the Company, he being just in the same position towards the Company as if he had been a mere stranger. It was the duty of the Directors to make a report showing correctly the state of the Company. It was no duty of Mr. Gilmour, in the case of Burnes v. Pennel , to make any representation at all as to that which he did represent; he was the mere law

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I think, therefore, that even if there had not been the ground to which I have already adverted, it must be taken that the representation of the state of the Company made by the Directors in their reports, supposing them to have been circulated by the authority of the Company, that is, by the Directors, (for they were the very persons to decide what was to be done with the reports,) must be taken as being a representation made by the Company to any person to whom such representation was made by the Directors. Therefore, if it be a fact to be collected from these statements that there were fraudulent misrepresentations made by the Directors in their annual reports to the Company, and they were (as they may be assumed from these pleadings to have been) circulated so as to mislead the Defenders, I think that must be taken as being the fraud of the Company.It was said that the persons imposed upon are the Company,—that the Company were the parties imposed upon, and not imposing, and, that these particular Defenders were themselves part of those persons who were so imposed upon, because they were themselves the owners of 1,100 odd shares in the Company previously to this purchase. My Lords, I do not think that even by the law of England, the circumstance that the person was already a shareholder would have made any difference in a transaction of this sort. I do not wish to bind myself upon that subject conclusively with respect to the law of this country—but, certainly, by the law of Scotland, a shareholder, even in an ordinary partnership, is considered as having a distinct identity from the partnership. We see

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Then that brings me to the last question in this case, which is this,—whether or not the fact of this fraud is sufficiently stated, so as to constitute a relevant defence? I wish I could satisfactorily come to the conclusion that it would be safe for your Lordships to decide that it is not relevantly stated, because I must remark upon this case, as I have frequently had occasion to remark in other cases, that it is most lamentable that the pleadings in Scotland are conducted in so very loose and vague a manner, that when the House is called upon to adjudicate upon the rights of parties, half its time is occupied, not in deciding what the law is, but in deciding whether the facts are so stated that your Lordships have before you the means of deciding what the law is. I wish I could come satisfactorily to the conclusion that this

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The mode in which it is stated is this, namely, that on the l6th of September 1847, about a month before the transaction in question, when what took place may be reasonably supposed to have influenced the parties in their estimate of the value of the shares, a report was submitted, representing that there were funds sufficient to pay a dividend of 8 per cent., leaving reserved as profit an amount exceeding 5,500 l . And that report, they go on to say, was entirely delusive; that no sufficient allowance had been made for bad debts, and so on. Then it is stated that the shareholders began to suspect that there was some fraud. “The Defenders were prevailed upon to enter into this transaction by gross fraud and misrepresentation. The reports of the Directors and the statements of their Manager were a tissue of falsehoods, and at the time when the Company undertook to act as brokers for the Defenders, and to advance the price of the stock, they concealed the fact that the affairs of the Company were utterly desperate, and that the stock which they professed to purchase was of no value, and might entail a serious loss on those who acquired it.Now, popularly reading that, you would have no hesitation in saying, this is clearly represented to be a fraud, because it is said that the Directors represented the state of the concern to be flourishing, and that this statement was a tissue of falsehoods, and that they concealed the fact of the insolvency of the Company, knowing it to be insolvent, and pretending that

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Lord Broughom's opinion.

The Lord Brougham:

My Lords,I, as well as my noble and learned friend, have had very grave doubts, to say the least of it,

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I take it, however, that we are now in this case to

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We then come, assuming these preliminary difficulties to be got over, to what the substance of the case is. Now, if my opinion had not been shaken by the statement of my noble and learned friend, who also originally held the opinion that I did with respect to the contract of loan being separate from the contract of purchase, if I had continued to be of that opinion, and if the new view of the case taken by my noble and learned friend had not struck me as being correct, I should then have found myself unable to concur in the proposition that the interlocutors appealed from should be affirmed; for I take the case to have been this:—The Company, being minded to have the value of its shares in the market kept up by the purchase of shares by the present Respondent, suggest to him that he ought to go into the market and buy those shares; and in order to remove any difficulty from his way in making that purchase, they offer to advance him a sufficient fund, 600l. and odd, by way of loan, wherewithal he might be able to make the purchase which the Company, for their own interest, in order to keep up the price of the shares, were desirous that he should make. They make a misrepresentation of the value of the shares; they are really

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Now, it is quite clear that he had an action against them for that false representation. It is quite clear that for the quantum damnificatus by that false representation, and by the purchase which the false representation induced him to make, he has, past all doubt, an action against those who made the misrepresentation. But is he not to repay the loan of money which they lent him? Did he not voluntarily take that loan from them for the purpose of enabling him to purchase the shares? No doubt he bought the shares owing to their misrepresentation, and suffered a loss. But he borrowed the money from the Company. And is he not bound to repay that loan, though he may have an action against the Company for their misrepresentation? If the Company bring their action against him for the repayment of the loan, he cannot set off in tort against the Company any claim that he may have against them for their misrepresentation in having deceived him. But is he not bound to repay the loan? That is the question. No doubt, if the whole is mixed up together, and taken to be one transaction, it may be liable to a different construction. But then this occurs. Is he to retain the shares worth 50 l .? He is told they were worth 100 l ., whereas they are only worth 50 l . The Company lends him enough to purchase them. That loan, it is said, is part of a fraudulent transaction, and is to be taken as not having been made. It is to be

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It is said, “The manager assured the Defenders that the Company would advance the necessary funds for purchasing the shares, and that the stock would be held until it could be sold at a profit.” Now, if it had stopped there, I should have had no doubt whatever that my noble and learned friend would have had a right to put it in the way he did, that it was an undertaking upon the part of the Company in lending the money not to call upon them for the repayment until that event took place— “until the shares could be sold at a profit.” But I am afraid that what follows renders that somewhat doubtful, for, after the statement “that the stock would be held until it could be sold at a profit,” it goes on to say, “without the Defenders being called upon for any contribution in money, the Company being secure by the large amount of stock held upon joint account.” That seems to me to be an undertaking, not to the effect that they will not call upon the

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Lord St. Leonards' opinion.

The Lord St. Leonards:

My Lords,I shall be very short in the observations which I have to address to your Lordships, after the very elaborate manner in which this case has been discussed by my noble and learned friends. My opinion is in favour of the Respondents.My Lords,I entirely agree with the observations which have been made as to the laxity in the Court of Session with regard to their pleadings. It has arisen, in a great measure, I take it, from their allowing relevant and irrelevant defences, and also from the mixture of law and equity, which some persons are so anxious to introduce into this country. When they do so, I hope they will be kind enough to adopt some machinery which will prevent us from falling into the errors to which that combined system has led in Scotland.

Lord Brougham : That is quite necessary.

Lord St. Leonards: My Lords, the first question is, whether there is a relevant defence? We have to decide that. We have not the issues to settle; that remains for the Court of Session. But is there a

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Now, if I understand the law of Scotland, the Courts of Scotland have adopted a different rule, and there are many cases in which general allegations have been deemed sufficient to let in a defence, so that there might be issues upon the particular facts. And it is upon that ground that I think that in this case the general allegations are sufficient to form a relevant defence.It is stated in the defence to the summons, “About the month of October 1847, before the shareholders were aware of the true condition of the Company's affairs, the Defenders were urgently solicited by Mr. Barlow, the manager, to purchase additional shares of the Company's stock. At that period, the shares began to fall in the market,” and so on. I do not quite go along with my noble and learned friend who spoke last, as to the construction of this part of the sentence, although there is a portion of it which is undoubtedly ambiguous. “The manager assured the Defenders that the Company would advance the necessary funds for purchasing the shares, and that the stock would be held till it could be sold at a profit, without the Defenders being called upon for any contribution in money.” That makes it perfectly clear to

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Now, if you will turn to the actual pleas which were pleaded in law upon these statements, one of them is this:
“More particularly as the National Exchange Company acted as the brokers for the Defenders in purchasing the stock, and prevailed upon them to do so by gross fraud, concealment, and misrepresentation, the Pursuers are barred from claiming payment of any advances on account of these shares.”
That is a clear plea, which would have to be proved at law, and which goes upon fraud against the Company.My Lords,you will find again, in the condescendence,

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We are, then, brought necessarily to the real facts of the case, which lie in a very small compass indeed. Independently of the questions which arise upon the representations made by the Company in their reports, (upon which my noble and learned friend on the woolsack has already so much enlarged,) there were specific representations made by the Company, or by their manager, to these particular Defenders. And, for the moment, I will put it out of sight that the Defenders themselves were shareholders in the Company. Now, with respect to these reports, in which very often Directors have indulged their fancy considerably, and not always consulted the exact facts, it is one thing to say how far the representation so made is to affect third persons, and how far it is to affect the Company. This is not a case in which the question is whether a dealing between two third parties could be affected by the representations in their report, which I am clearly of opinion it could not— that is to say, if John, believing the representations of the Company, had gone into the market and bought of Thomas shares which Thomas had to sell. John

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Now, what was the situation of the Company? The Company were bankers, money-lenders, and brokers—they acted in all those capacities of bankers, money-lenders, and brokers, and they particularly had a power to lend money upon shares. The allegation therefore is this: You, the Company, in these various characters, have induced me, the Defender, to buy shares in a falling market, representing to me that they were of value, when you knew they were valueless; and in order to induce me to do so, you said you would advance me money in your capacity as money-lenders to buy them; and, further, in order to carry on this transaction you told me that, in your capacity as brokers, you would buy the shares for me in the market, acting as my brokers; and, consequently, I fell into this trap (for such it must be considered to be). I said I will take these shares if you will advance the money, and, with the assurance that it was all profit and no loss, that the Company would be perfectly

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Now, what was the real transaction? No doubt the Defender was induced to write to the brokers, and he writes to them to buy certain shares. We were a good deal puzzled by the accounts, but upon looking at them they are very easily explained: You have two accounts, one of which is very damaging to the Company, and there is another account, which is the broker's account. Now, it was asserted that in the account of the purchases for the Defenders by the Company, the charge of commission of 3 l . was a charge of brokerage, but it was no such thing. The transaction was exactly this: The Defenders bought of T. G. Buchannan and L. M. Kerr, accountants and brokers, 200 shares; you will find that the whole charge for the purchase, with the expenses and the

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The result of that, therefore, is this, that the Exchange Company did not charge the Defenders with more than they paid for brokerage; which proves that they were buying themselves as brokers for the parties. Then, if you will look at the end of the account, if you want to account for the 3 l . commission, you will find that it is precisely what it purports to be, half per cent. upon the whole advance of money upon all the shares—just exactly 3 l .That, therefore, shows clearly that the 3 l . commission, which has been given up, and the 2 l . 10 s . were not charged to the purchasers. Then look at the heading of this account, which is the account sued for, which the Pursuers have founded themselves upon,—“Debtor, Messrs. Peter Drew and Mathew Dick, in account with the National Exchange Company, creditor.” What does that account consist of? Of all the purchases of these shares by the brokers employed, and the advances of money for the purchase of these shares. Is not that an adoption by the Company of the whole transaction? Do not they, by the

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Now, I have certainly come to this conclusion, that if representations are made by a Company fraudulently for the purpose of enhancing the value of their stock and they induce a third person to purchase stock, those representations so made by them for that purpose do bind the Company; I consider representations by the Directors of a Company as representations by the Company, although they may be representations made to the Company; it is their own representation. What is the first act which takes place at any such meeting as that at which the report was read? The first act which takes place at every such meeting in Scotland and in England is, that if there is not a rejection there is an adoption of the report; then I say the report is the act of the Company and not simply of the Directors. It does not stand as the simple statement of the Directors. It becomes the act of the Company by the adoption of the report, and sending it forth to the world as a true representation of their affairs; and if that representation is made use of in dealing with third persons for the benefit of the Company, it subjects them to the loss which may accrue to the party who deals, trusting to those misrepresentations. I therefore come to a very satisfactory conclusion in my own mind upon that simple point.The cases have been very much discussed, and a good deal of argument has turned very learnedly and ably upon the general question of representations by agents. I think we need not embarrass ourselves

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We have had very much to consider that case in Meeson and Welsby (a) , upon which I will say a word with regard to misrepresentation by agents. That was a very peculiar case, and, as it was explained by my noble and learned friend on the woolsack, there is no fault to be found with the decision in that case, because, there it was held that the Defendant had been induced, by fraud, covin, and misrepresentation on the part of the Plaintiff, to enter into the contract. The case was of this nature:—A house was to let, and I think it was next door to a brothel; it was a house which no respectable family could inhabit. The gentleman who was about to take it had a family growing up, of both sons and daughters, and it would have been utterly impossible for him to live in it under the circumstances. The owner was perfectly aware of the circumstance, and he employed an agent, who was not aware of

Footnote

( a ) Cornfoot v. Ffolkes .

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Now, supposing there had been in that case no allegation of fraud, but it had been put simply upon the ground of misrepresentation, it was not denied in the course of the Judgment, as I understand it, that if a principal, with knowledge of a fact which was material to the value of the property, employed an agent whom he knew to be ignorant of the fact, for the purpose of concealing it, he could not avail himself of that concealment, and he would be responsible. That, I think, seems to have been admitted in that Judgment. But I should take the liberty of going a good deal further. I should say, that if in that case fraud had not been alleged, but it had been put upon misrepresentation, and the fact were, that a man knowing that there is so serious a nuisance affecting a house as to diminish its value in such a way that no

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My Lords,one great difficulty that has been raised in this case is with respect to the liability of the Directors. Upon that I have already stated my view; but the doctrine of set-off has been urged, and the impossibility of reducing, as it is called, this transaction in this particular case. Now, I think the law of

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Footnote

( a ) The Equity of the Court of Session is a Prætorian or Roman Equity. The technical Equity of England is confined to England.

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My Lords,there are two cases which have been referred to in the Court of Session in Scotland. One is Brown's case , in 12th Shaw and Dunlop (a) . There an acting director, who was also a partner in a Joint Stock Company, brought an action against a purchaser of shares in his own name, just as here; and the defence set up false representations, and so on, which induced him to buy the shares. There the defence no doubt was this, that the man who was the Pursuer was himself a director, and they were his own shares. I only quote that to show that this was a case of fraud. The defence was admitted there to the whole transaction, just as in this case. There was a different ground of fraud and different parties, but not a different defence. The defence there was allowed to the whole of the demand, and nobody imagined

Footnote

( a ) P. 596.

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Then, with respect to the case of Graham v. The North British Banking Company , which is in 12th Volume of the Court of Session Reports, p. 907, there there was a fraud by the Bank, upon sales of shares, for which bills were given, just as here. An action of reduction was brought—not a mere defence, and that action was allowed. That was therefore, although a different case in circumstances, a case in which a man had been fraudulently induced to purchase shares, and that fraud gave him a right to reduce the whole transaction. This defence is exactly of the same nature. It is a defence to the whole transaction. About that I have no hesitation whatever.Upon the whole I concur with my noble and learned friends in advising your Lordships to affirm the decision of the Court below. It appears to me that the Pursuers have failed to make out their case. The sum in question is a small one. That does not affect the argument, no doubt; but for such a small sum there ought not to have been the great amount of expense incurred, which this proceeding must have occasioned to the parties; and it certainly does appear to me that those costs should be borne by the Appellants.Interlocutors affirmed, and Appeal dismissed with Costs .