Story Case

Joseph Brady, Frank Mcllroy, and Thomas Tilden were partners in a construction company. Tilden purchased all of the supplies for the company. He had an understanding with a lumber concern to the effect that he should receive ten per cent from the market price of all goods sold to the construction company, as a personal commission from the lumber company. This commission had amounted to $1,000 before the construction firm learned of it. They demanded an accounting from Tilden. The latter refused to pay, saying that his firm purchased materials at the regular price, and that the ten per cent commission from the market price was a personal matter between himself and the lumber company. Can Tilden be compelled to account?

Ruling Court Case. Mitchell Vs. Reed, Volume 61 New York Reports, Page 123; Same Case, Volume 19 American Reports, Page 252

Mitchell and Reed were partners, engaged in the business of conducting a hotel. They had certain valuable leases upon property for that purpose which were to expire in the year 1871. By the terms of their agreement, their partnership was also to expire in the same year. Two years before the expiration of the term the defendant, Reed, secretly procured a renewal of these leases in his own name; and, although he was in daily intercourse with the plaintiff, he concealed from the latter what he had done, and for over a year the plaintiff was in ignorance of the fact. Now the partnership owned a quantity of hotel fixtures and furniture, valued at about $100,000. It was not evident that they intended either to go out of the business or to reorganize and continue it, at the time when the defendant secretly procured these leases.

This was an action brought by the plaintiff, claiming that the defendant should be compelled to hold the leases so procured for the benefit of the partnership. Decision: One of the first duties of a partner is the exercise of good faith both as to the partnership and as to the members thereof. He may not so situate himself that self interests will conflict with his duties to his copartners and the firm. In this case, the defendant, by procuring these leases, became so situated that his own interests might be in direct conflict with the interests of the partnership. It was to the interest of this partnership that the hotel furniture should be disposed of as advantageously as possible. Therefore, it was to their interest that the leases should be renewed in the name of the partnership, and the leases assigned at the same time, and they would have been able to dispose of the property more advantageously.

Mr. Justice Early said: "The relation of partners with each other is one of trust and confidence. Each is the general agent of the firm and is bound to act in entire good faith to the other. The functions, rights, and duties of partners in a great measure comprehend those both of trustees and agents and the general rules of law applicable to such characters are applicable to them. Neither partner can, in the business and affairs of the firm, clandestinely stipulate for a private advantage to himself. He can neither sell to nor buy from the firm at a concealed profit to himself. Every advantage which he can obtain in the business of the firm must enure to the benefit of the firm." It was, therefore, decided that the defendant should hold the leases for the benefit of the partnership.

Ruling Law. Story Case Answer

The relation existing between partners, like the relation between principal and agent, is one of trust and confidence. Because of this relation, the law demands of each partner the highest degree of good faith in dealing with his copartners and third persons generally, where the interests of the firm are involved. He will not be permitted to secretly sell to himself firm property; or sell property to the firm in like manner. Every advantage and every profit which a partner makes by virtue of the fact that he is a partner, or by dealing with partnership property, must enure to the benefit of the firm. Clearly, therefore, in the Story Case, Tilden can be made to account to the other members for this secret profit.