Case Name: William R. Hallet v. James Desban
Court: Louisiana Supreme Court
Jurisdiction: Louisiana
Decision Date: 1859-06
Citations: 14 La. Ann. 529
Docket Number: 
Parties: William R. Hallet v. James Desban.
Judges: 
Reporter: Louisiana Annual Reports
Volume: 14
Pages: 529–536

Head Matter:
William R. Hallet v. James Desban.
A community of profits is tlio criterion "by which to determino the contract of partnership ; hut to render a party liable as a partner, he must share in the profits as principal, and not as a more agent, factor or semant.
from the Pifth District Court of New Orleans, Eggleston, J.
T. J. & A. O. Semm.es, for plaintiff and appellant. Whitaker <& Fellows, for defendant.

Opinion:
Voorhies, J.
The plaintiff, a creditor of the firm of J. B. Steel & Co., sues the defendant, who acted in the capacity of confidential clerk, book-keeper and agent of the firm, to render him liable as a partner, on the ground that his services as clerk and agent were remunerated by one-fourth of the net profits.
The question is, whether, notwithstanding the fact that, as between the partners, the defendant was a mere agent and subordinate, he can be held liable, as a partner, to third persons, to whom he has not appeared in any but the real capa,-city of clerk and agent. The plaintiff, it is proper to remark, states in his petition, " that the defendant, James Beslan, ostensibly acted as the chief clerk and bookkeeper of said Steel in his said business, but in truth and in fact, the said Beslan was interested in the profits of said business, and was, in law, a dormant partner of said Steel, of which fact your petitioner was entirely ignorant."
As between the defendant and the firm of J. B. Steel & Co., it is clear that the former was not a partner. There was no express or implied consent to that effect, and in truth, the stipulation was quite otherwise. " Partnership must be created by the consent of the parties." C. C. 2776; 11 An. 278, Pickerel v. Fisk.
The rule, with regard to third persons, concerning the liability of parties who have a share or proportion in the profits, is different when they appear as principals, or merely as agents, clerks, or factors. In the latter case, they are not responsible to creditors, but in the former, their liability invariably attaches. The 2784th and 2785th Articles of the Civil Code apply to the partners, and not to the class of persons whose services are remunerated by a proportion of the profits.
These Articles read :
O. 0. 2784. " A participation in the profits of a partnership carries with it a liability to contribute between the parties to the expenses and losses, but, the proportion, like that of the profits, may be regulated by the stipulation of the parties, and, where they make none, is provided for by law."
0. C. 2785. " A stipulation that one of the contracting parties shall participate in the profits of a partnership, but shall not contribute to losses, is void, both as it regards the partners and third persons. But in the case of a partnership in commendam, hereinafter provided for, the liability to loss may be limited to the amount of stock furnished."
These Articles evidently refer to those acting as principals in the contract of partnership, and not to such as are mere employees, whose exertions as such are stimulated by a share in the profits, without their being invested thereby with " any additional control over the affairs of the partnership, nor authorized to bind the house or firm, further than by the express consent of the partners, or an implied consent resulting from the nature of their employment."
Such has been the view taken upon this subject by our courts.
For instance, in the case of Bulloc v. Pailhos, reported in 9 La. 462. Bulloc had entrusted to Pailhos a quantity of goods for sale; the latter was to receive, by the articles of agreement, one-half of the profits on the goods, as compensation for his labor. The court said, "We think with the plaintiff that the defendant was not a partner, but an agent. He is so stated in the agreement. The property was not at joint risk. The share in the profits was the compensation he was to receive for his labor." 8 N. S. 174, Bulloc v. Pailhos.
In the case of St. Victor v. Daubert, 9 La. 317, the court again said, " Between the partners of a commercial house and a clerk who, in addition to his monthly salary, is allowed as a further stimulus to his industry, a share of the profits, we have no hesitation in deciding that this allowance does not constitute him a partner ; it gives him no additional control over the affairs of the partnership, nor does it authorize him to bind the house, or firm, further than by the express consent of the partners, or an implied consent resulting from the nature of his employment. The person thus employed and rewarded has no right to retain the funds of the house, which employed him to collect them. They must be supposed, until the affairs of the partnership are liquidated, to be provided for, and required to meet its engagements, and afterwards to reimburse the partners for their advances, before a division of the profits is made."
In the case of Cline v. Caldwell, the court remarked, " The circumstance of the manner in which the actor was to receive remuneration or payment for his performances, by an allowance of a share in the profits gained by them, although it makes a slight change in the ordinary contract of hiring for fixed and certain wages, does not create one essentially different. Overseers of plantations are fre quently hired on the express condition of receiving, in lieu of a certain salary, a portion of the profits arising from crops, &c.; but on that account it is believed that they ought not to be considered as in partnership with the owners of the property used to produce the crops." 4 La. 139.
The cases of Bank of Tennessee v. McKeage, 11 R. 136, and of McDonald v. Millaudon, 5 La. 408, are reconcilable with the above quoted decisions; for in both of them the parties appeared as principals, and not as employees or agents. In the case of Lee et als. v. Bullard et als., the clerk, whose compensation depended on the profits, was held liable; but the court expressly states, " Besides this participation in the net profits, on several occasions he held himself out as a partner, and thus clearly rendered himself liable." 3 An. 462.
Judge Story says, " There may be a community of interest in the profits between the parties, without any community of interest in the property itself. But this participation in the profits will not (as we have seen) create a partnership between the parties themselves, as to the property, as well as the profits, contrary to their intentions. Nor will it necessarily create such a partnership in all cases, as to third persons."."Thus, if a party has no interest whatsoever in the capital stock and as between himself and the other parties, he has also no rights as a \partner, or no mutuality of powers and duties, hut is simply emplcryed as an agent, and is to receive either a given sum out of the profits, or a proportion out of the profits, or a residuum of the profits beyond a certain sum, as a compensation for his labor and services, as agent of the concern, and not otherwise ; he will not be deemed a partner in the concern from that fact alone; not a partner with the others inter sese, for that would be contrary to their intentions and objects, nor as to third per. sons, because the transaction admits of a different interpretation, and may justly be deemed a mere mode of ascertaining and paying the compensation of an agent, as in a naked case of agency. In such a case, it may be properly enough said, that the agent is entitled to a share or portion in the profits, liquidated or unliquidated, and, therefore, that he has, in a certain sense, a community of interest therein with the actual partners. But he does not participate therein as an owner pro tanto, or as possessed thereof per my et per tout, or as clothed with the rights, powers and duties of a partner. He has only a limited interest therein, either as entitled to a fixed sum, to be paid out of the profits, or as entitled to a lien thereon, or as possessed of an undivided portion thereof, as a tenant in common." Story on Partnership, g 32.
Chancellor Kent says, " A person may be allowed, in special cases, to receive part of the profits of a business, without becoming a legal or responsible partner." Vol. 3, p. 33. He also says, in speaking of the essence of the contract of partnership, " It is sufficient that his interest in the profits be not intended as a mere substitute for a commission, or in lieu of brokerage, and that he be received into the association as a merchant, and not as an agent." Vol. 3, p. 25.
Smith on Mercantile Law states, at page 40 :
" This community of profit is the criterion whereby to ascertain whether a contract be really one of partnership, for one partner may stipulate to be free from loss, and the stipulation will hold good as between himself and his companions, though it will not diminish his liability to strangers."
But this author adds further in explanation, that, " to constitute such a community of profit as is here intended, a partner must not only share in the profits of his companions, but must share in them as a principal, i. e., he must not be a mere agent, factor, or servant, receiving, in lieu of wages, a sum proportioned to the profits gained by his employers, or a certain portion of a fund which includes the profits, but is not dependent on them for existence."
It is true, that it is laid down as a rule, " that if a servant or agent stipulate for a share in the profits, and so entitle himself to an account of them, he becomes, as to third persons, a partner, though in questions between himself and his employer, he would not be so considered." Smith, M. L. 43. The author then states, that this distinction is extremely fine, and quotes the following expression of Lord Eldon in Ex parte Harper: " It is clearly settled, though I regret it, that if a man stipulates that he shall have, as the reward of his labor, not a specific interest in the business, but a given sum of money, oven in proportion to a given quantum of the profits, that will not make him a partner; but if he agrees for a part of the profits as such, giving him a right to an account, he is, as to third persons, a partner."
The sum and substance of this doctrine is, that a community of profits is the criterion by which to determine a contract of partnership ; but the party must share in the profits as a principal, and not as a mere agent, factor, or servant. If, however, this agent or servant stipulates for a share of the profits, so as to entitle him to an account, then he is held bound as a partner. Bat then it is necessary that he have clearly the right to an account, in order to place him on the same footing as a principal; and Chancellor Kent lays it down, " that the interest, however, in the profits, to render one responsible as a partner, must be such as will entitle him to an account, and give him a specific lien or preference in payment over other creditors." Vide Smith M. L. 44, (notes).
The English decisions on this subject are not so very uniform as could be expected, as will appear by the following quotations :
" To make a party liable to a third person, as a partner, he must either be in fact a partner, or must have held himself out as a partner." Dickenson v. Valpy, 5 M. & R. 126.
" An agent who is paid by a proportion of the profits of the adventure, is not therefore a partner in the goods." Meyer v. Sharpe, 5 Taunt. 74.
" If the agreement between the owner of a lighter and of his man had been, that the man, in consideration of working the lighter, should have received half the gross earnings, it would not have constituted a partnership, being- only a mode of paying the man for his labor. Alitor, however, if the stipulation was for the net profits." Dry v. Boswell, 1 Camp. 329.
" A partner in a firm contracted to give his clerk one-third portion of his (the partner's) own share in the profits. The other partners knew of, and assented to the arrangement. Held: that this did not make the clerk a partner." Holme's case, 2 Lewin ; C. C. 256.
See also the cases of Wist v. Small, 1 Camp 331; Benjamin v. Porteus, 2 H. Black, 590 ; Smith v. Watson, 3 D. & R. 71; Burnell v. Hunt, 5 Jar. 650 O.B.; Wilson v. Whitehead, 10 Mee & W. 503.
The ground upon which is based the doctrine, that an agent who receives a share in the profits, as such, becomes liable to third persons, as a partner, is, " that those profits form a portion of the fund upon which creditors have a right to rely for payment," (Pott v. Eyton, 3 C. B. 32); and yet, if a clerk contracts for the net profits, after the payment in full of all the liabilities, he becomes liable as a partner, — whilst, if he gets a proportion of the gross profits, without reference to the payment of the debts, he escapes the liability of a partner! This is on a par with the nice distinction, so much regretted by Lord Eldon, between a proportion of the profits and a sum equal to a given quantum of the profits. In other words, under this distinction, a clerk who gets from his employer, in payment of his services as employee, one-fourth of the net profits, is a partner, because he has a right to sue for an account; but if he stipulates for a sum equal to one-fourth of the net profits, then he is not a partner, having no right to demand an account 1 It will be conceded, that in either hypothesis, the clerk, in this State, would have the right to sue his employer, and to look into the accounts of the firm, for the purpose of ascertaining the amount due him. And, on the other hand, it is evident that, in neither hypothesis would he have the right to sue for a liquidation or dissolution of the firm or partnership. The truth is, that the employee's interest in the profits, where he is not, besides, a principal in the partnership, does not vest him with additional authority in the management of its affairs ; his responsibility is always the same, even as regards third persons.
Under this view of the case, — it appearing that the defendant was not in reality a partner, and did not hold himself out as such, and especially, that that was the plaintiff's own understanding at the time, — judgment must be rendered in favor of the defendant.
It is, therefore, ordered and decreed, that the judgment of the District Court be affirmed, with costs.