Teacher v Calder

JurisdictionEngland & Wales
CourtHouse of Lords
Judgment Date24 Jul 1899
Docket NumberNo. 5.
House of Lords

Lord Watson, Lord Shand, Lord Davey.

No. 5.

ContractAgreement to abide by AuditAudit in ignorance of agreement.

A advanced 15,000 to B to be used in the business of the latter for five years, in return for which A was to receive, besides interest, 371/2 per cent of the profits of B's business. In the agreement it was stipulated that there should be an annual audit of B's books by the the firm of M & Co., accountants, and that their certificate as to the amount of profits should be binding on both parties. B's books were audited by G, a member of the firm of M & Co., for four years. Subsequently A raised an action against B for a judicial accounting, on the ground that the audit had not been in terms of the agreement, in respect that G did not know of the agreement, and did not know that his estimate of the profits was to be binding on A and B.

The evidence shewed that G had made his audit without knowledge of the agreement.

Held (rev. judgment of First Division) that it was an implied term of the agreement that the auditor should have knowledge of it and of the finality of his audit, and therefore that the audit had not been made in terms of the agreement, and was not binding on the parties.

ContractBreachAgreement not to withdraw capital from business Damages.

A lent B 15,000 to be used in his business of timber-merchant, under an agreement to last for five years. The agreement did not make A a partner, but gave him a share of the profits. It also provided that B should always keep at least 15,000 of his own capital in the business. In violation of the agreement, B reduced his capital in the business much below the stipulated amount by withdrawing large sums; these he employed in a distillery business, where large profits were earned.

Held (aff. judgment of First Division) that A was not entitled to have the damages for B's breach of contract assessed on a computation of the profits earned by the diverted capital in the distillery business, but that the appropriate basis of assessment was a calculation of the extra profits which might have been earned in the timber business by the employment therein of the diverted capital.

(In the Court of Session, February 25, 1898, 25 R. 661.)

The testamentary trustees of Adam Teacher the pursuer appealed. The previous proceedings are narrated in the opinion of Lord Watson.

Lord Watson.Upon April 11, 1889, a minute of agreement was executed between the late Adam Teacher, wine and spirit merchant in Glasgow, of the first part, and the respondent, James Calder, timber merchant, Glasgow, carrying on business there under the name or firm of Calder & Co., of the second part. The agreement,on the narrative that the second party had applied to the first party for capital to be applied by him to extend and carry on his business as timber merchant, which the first party had agreed to give, in consideration of receiving the interest and share of profits or additional interest, in terms of the Act 28 and 29 Vict. cap. 86, contained, inter alia, the following stipulations, which the parties bound themselves to observe:

The first party agreed to advance in loan to the respondent, to be put by him as capital into his business of Calder & Co., the sum of 15,000 between the 1st day of May and the 1st day of November,1889. The first party also agreed to become cautioner to the Commercial Bank of Scotland, Limited, for 20,000 to be advanced to the respondent for the purposes of his said business.

It was agreed that the respondent should pay to Mr Teacher, in the first place, interest upon his loan of 15,000 at the rate of 5 per centum per annum, beginning the first annual payment at the term of Whitsunday, 1890; and, in the second place, by way of additional interest, such further sum as should be equal to 371/2 per cent of the net profits of the respondent's business of Calder & Co., under deduction at the rate of 5 per centum per annum upon the capital of the respondent, and of any partner he might thereafter assume, and upon the said loan of 15,000, and also under deduction of the interest on the said bank credit or other interest, and on any addition to and accumulation of capital which under the provisions of the minute of agreement might be added thereto during the continuance of the said loan and bank credit, and also of the other charges and expenses of the business, and allowing a reasonable depreciation on plant, but not deducting anything for salaries to partners.

It was agreed that the books of Calder & Co. should be balanced as on the 30th day of April 1889, the day before the minute came into operation, and that the respondent's capital in the stock and plant of the firm should be valued and ascertained. In the event of the first party being dissatisfied with the valuation, it was provided that the amount of the respondent's capital stock should be valued by two arbiters, with power to them to appoint an oversman in case of their differing in opinion. It was also provided that the respondent, in the event of his capital not amounting to at least 15,000, should put into the business a sum sufficient to raise the capital to that amount.

The fifth article of the minute, which relates to the ascertainment of the net profits of the business of Calder & Co. divisible between the first and second party, has formed the main subject of controversy in this appeal. It stipulates thatThe books of the said firm shall thereafter be balanced annually on the 30th April, and shall be audited by Messrs M'Clelland, Mackinnon, & Blyth, chartered acountants, Glasgow, or other auditors to be mutually agreed upon and appointed by both parties hereto, and the certificate of the auditors shall be binding on both parties as finally fixing the amount of the profits in each year, and the foresaid interest or percentage payable to the first party.

The minute was to continue in force for the term of five years, but either of the parties had right to bring it to a termination at the end of three years, upon his giving the other party six months' notice in writing prior to the 1st day of May 1892. It was stipulated that the respondent, Mr Calder, and any other partners that might be assumed by him into the firm of Calder & Co., should have power to draw interest on capital as well as their share of the profits of the business, or might leave them in the business as capital, bearing interest at 5 per cent per annum, but that no capital should be withdrawn from the business so long as Mr Teacher's loan was unpaid and his liability for the bank credit of 20,000 undischarged. The minute also provided that, in the event of any disputes or differences arising as to the agreement between the parties thereto or their representatives in regard to the agreement, the business of Calder & Co., or the conduct or winding-up thereof, the same should be and were thereby submitted to the amicable decision, final sentence, and decree-arbitral of William Mackinnon, accountant in Glasgow, whom failing of Andrew Mackinnon, bank-agent there, as arbiters in succession mutually chosen, whose decision or decisions, interim or final, should be conclusive and binding upon both parties.

After the minute of agreement was completed, Mr Teacher called with it upon Mr William Mackinnon, the leading member of the firm of accountants who had been appointed to audit the books of Calder & Co. He did not see Mr Mackinnon, and called again at the office, when he had an interview with another partner, Mr Robert Blyth, to whom he gave the minute of agreement, and, after discussing its terms with that gentleman, left it with him to be communicated to Mr Mackinnon. Mr Blyth on the same day made an abstract of the terms of the minute; and, according to his evidence, he gave back the minute to Mr Teacher, and believes that he handed the abstract to Mr Mackinnon on his return to the office. He says, I had nothing more to do with the matter, and I took no more concern with it whatever. Nothing more is heard of the abstract, and it is not said or suggested that it was seen or read by anyone in the office save Mr Mackinnon, who died not long after he received it, until it was discovered among some other papers in the year 1894.

The parties to the agreement, the late Mr Teacher and the respondent, Mr Calder, understood and believed that the accountants, to whom they had entrusted the function of auditing the annual balance-sheets of Calder...

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2 cases
2 books & journal articles
  • The Treatment of Teacher v Calder in AG v Blake
    • United Kingdom
    • The Modern Law Review Nbr. 65-2, March 2002
    • 1 March 2002
    ...in (1898) 25 R 661. They will be referred to as IH.Proceedings in the House of Lords (Scotch Appeals) are reported, inter alia, in [1899] AC 451. Theywill be referred to as HL(Sc).3 The wider issues raised by Blake are examined in D. Harris et al, Remedies in Contract and Tort, 2ndedn (Lond......
  • The Extinguishing of Contract
    • United Kingdom
    • The Modern Law Review Nbr. 67-5, September 2004
    • 1 September 2004
    ...was prepared to grant thenecessary interim orders, one’s serious disquiet about these cases would turn to47 (1898) 25 R 661.(CtSess) and [1899]AC 451 (HL(Sc));discuss ed in Campbellabove n 10, 266^268.48 [2002] EWHC 1353 (QB) and Hendrix above n12 (CA); discussed in Campbell andWylie above ......

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