Supreme Court of Canada
Farrell v. Manchester and Portland Rolling Mills Co., (1908) 40 S.C.R. 339
Date: 1908-06-16
Michael Farrell (Plaintiff) Appellant;
and
James Manchester, Robert C. Elkin and The Portland Rolling Mills (Defendants) Respondents.
1908: May 19-21; 1908: June 16.
Present: Girouard, Davies, Idington, Maclennan and Duff JJ.
ON APPEAL FROM THE SUPREME COURT OF NEW BRUNSWICK.
Company—Paid-up shares—Sale by broker—Prospectus—Misrepresentations—Rescission—Delay—Liability of directors.
F. in June, 1903, purchased paid-up shares in. the capital stock of an industrial company on the faith of statements in a prospectus prepared by a broker employed to sell them. In January, 1904, he attended a meeting of shareholders and from something he heard there suspected that some of said statements were untrue. After investigation he demanded back his money from the broker and wrote to the president and secretary of the company repudiating his purchase. At subsequent meetings of shareholders he repeated such repudiation and demand for repayment and in December, 1904, brought suit for rescission.
Held, that his delay, from January to December, 1904, in bringing suit was not a bar and he was entitled to recover against the company.
Held, also, that he could not recover against the directors who had instructed the broker to sell the shares as they were not responsible for the misrepresentations in the prospectus.
Judgment of the Supreme Court of New Brunswick (38 N.B. Rep. 364), affirming the decision at the hearing (3 N.B. Eq. 508) reversed.
Appeal from a decision of the Supreme Court of New Brunswick (1) affirming the decree of the judge in equity (2) in favour of the defendants.
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This is a suit brought in the Supreme Court in Equity, of the Province of New Brunswick, by the appellant against the respondents for the repayment to him of three thousand dollars and interest thereon from the twenty-fourth day of June, 1903, on the ground that the same was obtained fraudulently, illegally, and by false pretences.
The Portland Rolling Mills, Limited, one of the respondents, was incorporated under the New Brunswick Joint Stock Companies Act in March, 1899, and has its plant and place of business in the city of St. John. In June, 1903, the respondent, James Manchester, was president, and the respondent, R. C. El-kin, was managing director and treasurer of the company. The capital stock of the company was f 90,000, divided into 900 shares of $100 each, of which the amount paid up prior to June, 1903, was $45,300, comprising 453 shares, leaving 447 shares called "Treasury Stock" held by the company and representing $44,700 unpaid at that time.
On the 26th of May, 1903, the directors passed a by-law authorizing the issue of $20,000 of treasury stock at par, and empowering the president and treasurer to employ a broker or other person to sell the stock at a reasonable commission. The president of the company, the respondent, Manchester, and the treasurer, the respondent Elkin, pursuant to the said authority, on a subsequent date, but previous to the 24th of June, 1903, employed one F. S. Sharpe, now deceased, to sell the stock at a commission of three per cent. Mr. Sharp drew up a prospectus, in which appeared the names of the directors of the company, and in which, among other things, it was alleged, contrary to fact, that with the exception of a small outside interest, the present paid-up capital of the company
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was, at that time, held by the directors, and that it was understood they would increase their holdings by taking up most, if not all, of the treasury stock remaining to be disposed of. No mention was made of the liabilities of the company, which at that time amounted to about $120,000. Some time in June, 1903, Mr. Sharpe called on the appellant, read over and gave a copy of the prospectus to him, and asked him to invest in the stock of the company. The appellant, relying upon the statements contained in the prospectus, purchased, through Mr. Sharpe, thirty shares of the capital stock of the company, paying therefor the sum of Three Thousand Dollars. The appellant received a stock certificate for the thirty shares of stock, dated June 24th, 1903, and bearing the seal of the company and the signatures of James Manchester, president, and E. C. Elkin, treasurer.
The appellant attended a meeting of the share holders of the company on the 26th day of January, 1904, when for the first time his suspicions were aroused as to the truthfulness of certain statements contained in the prospectus, upon which, among others, he particularly relied in purchasing the stock, viz.: That it was understood the directors (therein named) would increase their holdings by taking up most, if not all, of the treasury stock remaining to be disposed of, and that, with the exception of a small outside interest, the then present paid-up capital of the company was held by the directors. The appellant almost immediately interviewed Mr. Sharpe, and upon obtaining information which confirmed his suspicions, he demanded, of Mr. Sharpe, repayment of the $3,000, and on February 5 1904, he wrote a letter to the president, in which he repudiated the stock, demanding back his money. On two subsequent occasions, in
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February and March, 1904, he attended shareholders' meetings. At one of those meetings he tendered his stock certificate, and at both meetings reiterated his demand that the money which he paid for the stock he returned to him. He took no part in the business of those meetings, nor did he at any time after he repudiated treat the stock as his own. On March 14th, 1904, the appellant wrote to the secretary of the company, requesting a copy of the last annual report. He made a similar request in a. letter to the president, bearing date of March 19th, 1904. On the 13th of April, 1907, the respondent Manchester wrote to the appellant that the condition under which he took the stock had not been changed. The respondents did not provide the appellant with a copy of the annual report as requested, nor did they return the money and the appellant issued a summons in the Supreme Court in Equity, on December 22nd, 1904.
The case was heard before the Judge in Equity, who held that the appellant (plaintiff) had a right, as against the company, upon the ground of misrepresentation, to have the contract rescinded, and the money repaid with interest, but upon the ground of delay in commencing the suit, held that he was debarred from recovering against the company, and therefore was also debarred from recovering against the individual defendants, Manchester and Elkin. He also held that the defendants, Manchester and Elkin, did not authorize the preparation of the prospectus, and did not adopt it in any way, and dismissed the bill as against all the defendants with costs. The plaintiff appealed to the Supreme Court en banc of New Brunswick, and that court, in a judgment delivered by the Judge in Equity (now Chief Justice), dismissed the
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appeal with costs on the ground of delay in commencing the suit. Hence the appeal to this court.
Ewart K.C. and J. M. Price for the appellant.
Eanington K.C. for the respondent company.
Teed K.C. for the respondents Manchester and El-kin.
Ewart K.C. and J. M. Price for the appellant. The plaintiff was first put on inquiry in January, 1904, and after investigation immediately repudiated his purchase of the shares. It was the duty of the company then to strike his name from the list of shareholders and return his money. Reese River Silver Mining Co. v. Smith, per Lord Hatherley, at p. 74.
The action if at law for deceit would not be barred and equity, by analogy, follow the law. Peek v. Gurney.
If repudiation is prompt delay in bringing suit is no bar unless the position of defendants is changed.
Greater delay than occurred here has been held no bar. See Erlanger v. New Sombrero Phosphate Co.; Lindsay Petroleum Co. v. Hurd.
The defendants Manchester and Elkin as directors by employing the broker became assenting parties to all that he did to effect sales. Cullen v. Thompson's Trustees; Glasier v. Rolls; Cargill v. Bower.
The plaintiff may bring one action for rescission and damages; Bagot v. Easton; and may recover damages from the directors as for deceit; Vernon v. Oliver.
Eanington K.C. for the respondent company. The statements in the prospectus were not material and
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were made in good faith. Central Railway Co. of Venezuela v. Kisch.
Teed K.C. for the respondents Manchester and El-kin. It was incumbent on the plaintiff to enforce his claim for rescission with the greatest promptitude. Central Railway Co. of Venezuela v. Kisch, at p. 125. In Re Russian Ironworks Co.; Taite's Case a delay of one month disentitled the plaintiff to relief. And three and four months' delay have been held fatal. Heymann v. European Central Railway Co.; Re Cachar Co.; Lawrence s Case.
Prompt repudiation of the contract will not suffice. It must be followed speedily by suit. Kent v. Freehold Land & Brick-making Co.. And see In re Scottish Petroleum Co..
Even if the statements in the prospectus were material and untrue the directors, are not liable as they committed no actual fraud. Berry v. Peek. The broker was not their agent but only agent of the company. Wier v. Bell.
The plaintiff cannot obtain rescission and recover damages in the one suit. Ogilvie v. Currie.
The judgment of the court was delivered by:
IDINGTON J.—The lucid and comprehensive judgment of the learned trial judge, now Chief Justice of New Brunswick, shews how the respondent company
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engaged an agent to sell stock issued or proposed to be issued by that company and, as a consequence, was responsible for the material misrepresentations made by the agent.
So far as the company is concerned and its original liability to rescission arising from these causes and to refund the appellant the money received from him by virtue of such misrepresentation, the learned judge's finding cannot be questioned.
I cannot agree, however, that the right of rescission was lost by delay.
The appellant, at a shareholders' meeting, on 26th January, 1904, had reason, for the first time, to doubt the truth of the representations made to him.
He soon saw the agent who had sold the stock and complained to him and demanded a return of his money. Then on the 5th of February, 1904, he wrote the defendant, Manchester, president of the company, to the same effect, attended a meeting on the 16th February, to demand his money back and tender a surrender of his stock, attended another time to repeat this in March, when the meeting failed to organize, and, on the 19th March, wrote a very long letter for the same purpose and to set forth what the agent's side of the story was. These tenders and letters brought no reply till a brief note of the 13th April, which I will refer to later.
The repudiation and right to rescission was asserted so promptly and so persistently pressed without eliciting any reply until 13th April, that I fail to see how respondents can complain of delay in suing, at least till then. Contemptuous silence may be a fitting answer to a direct charge of personal fraud. But here, the complaint was of the conduct of an agent. It was the duty of the directors to have investigated. See
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remarks of Lord Hatherly, if authority needed, referred to later. It was the duty of the appellant to have awaited the result for a reasonable time.
The effect of delay or laches is stated in the case of Lindsay Petroleum Co. v. Hurd, at page 239, et seq., as follows:—
Now the doctrine of laches in courts of equity is not an arbitrary of a technical doctrine. Where it would be practically unjust to give a remedy, either because the party has by his conduct done that which might fairly be regarded as equivalent to a waiver of it, or where, by his conduct and neglect, he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted; in either of these cases, lapse of time and delay are most material. But in every case, if an argument against relief which otherwise would be just is founded upon mere delay, that delay, of "course, not amounting to a bar by the Statute of Limitations, the validity of that defence must be tried upon principles substantially equitable. Two circumstances, always important in such cases, are the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy.
This was cited with approval by Lord Blackburn, in Erlanger v. The New Sombrero Phosphate Co., at page 1278, as follows:—
I have looked in vain for any authority which gives a more distinct and definite rule than this; and I think, from the nature of the inquiry, it must always be a question of more or less depending on the degree of diligence which might reasonably be required, and • the degree of change which has occurred, whether the balance of justice or injustice is in favour of granting the remedy or withholding it. The determination of such a question must largely depend on the turn of mind of those who have to decide and must, therefore, be subject to uncertainty; but that, I think, is inherent in the nature of the inquiry.
He also cited with approval from Clough v. London
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and North Western Railway Co., at page 35, the following:—
We think that so long as he has made no election he retains the right to determine it either way, subject to this, that, if in the interval whilst he is deliberating, an innocent third party has acquired an interest in the property, or if, in consequence of his delay, the position even of the wrongdoer is affected, it will preclude him from exercising his right to rescind.
And he adds:
I think it is clear on principle of general justice that as a condition to the rescission there must be a restitutio in integrum. The parties must be put in statu quo.
These quotations must be accepted as undoubtedly correct expositions of the law.
There has been no departure from these principles by any court deciding any of the cases of shareholders repudiating, in such cases of fraud, the contracts they may have entered into.
In regard to the contracts of shareholders or subscribers for shares, the nature of the act enabling the companies, in such cases, to become incorporated or incorporating them and the responsibilities assumed by virtue thereof either to fellow-subscribers or fellow-shareholders or creditors of such corporate bodies have all to be reckoned with in order that any attempted repudiation of a subscription for or acceptance of a share or shares may not be done to the unjust detriment of those third parties; or in conflict with the statutory obligations assumed by virtue of the subscription for shares or of acceptance thereof under the conditions that may have arisen before repudiation.
The statutory obligation does not exist in such a case as this. The appellant took no part in creating the company or issuing this new stock, but merely
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bought and paid in full $3,000 for stock subject to no further call and repudiated the purchase when he found it had been induced by fraud. Neither creditor nor shareholder is entitled to look for further assistance. What then is the third party's right that is to be affected by a rescission? What is the injury to be done such an one? How can it come about? How, by any possibility, could there spring out of the delay from April to December, in this case, any wrong or deprivation that would not have been suffered if suit had been brought in the former month instead of the latter?
The reason assigned for any distinction in regard to right of rescission between a contract to take shares and other contracts is well put by Fry L. J., in Re Scottish Petroleum Company, at page 438:—
As regards such contracts the legislature has interposed and has provided that they shall be made known in a particular way to shareholders and creditors; notice of them is given to the world. Now, the general principle is that no contract can be rescinded so as to affect rights acquired bona fide by third parties under it. It is true that the creditors and the other shareholders have not acquired direct interests under the contract, but they have acquired an indirect interest. The shareholders have got a contributory; the creditors have got another person liable to contribute to the assets of the concern. So that, although in the case of voidable contracts simple repudiation is enough there must, in the case of a voidable contract to take shares be a repudiation and something more before the winding-up commences.
That relates to the contract to take shares. But what of the contract to pay for shares taken? The same reasoning answers there also.
But what of the cases where the shares have been paid up? There is no new co-contributory or obligation created by statute in favour of the creditor. The creditors stand, just as the creditors of one of the
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thousand and one others whose fortune, founded on fraud, has disappeared to the grievous disappointment of the creditors.
The case of Be Cacher; Lawrence's Case, has been relied upon both in the court below and in the argument of the respondent before us.
With the greatest respect for the court, I am unable to find how any support can be derived therefrom in this judgment.
The Lawrence Case, is presented to us in the respondent's factum, as follows:—
In Lawrence's Case () a delay of May to the 27th of September, being four months and eleven days, was held to be sufficient to deprive the appellant of any right he had to repudiate the shares.
There is no question of winding-up in this case.
Being typical of other cases and arguments therefrom pressed by respondent's counsel, let us see what it means and what foundation there is to it, or possible use to be made of it for laying a foundation to decide this case.
The facts which the report of the case presents are, that when the company was being promoted, in July, 1865, a copy of the prospectus was handed to Lawrence, probably pursuant to previous correspondence in anticipation of the project; that, on the 4th of September, 1865, he signed and sent in an application for 2,000 shares, paying a deposit of 10s. per share; that the company was incorporated and memorandum of association registered on the 11th of September, 1865; that on the 7th October, 1865, he received a letter of allotment of 2,000 shares; that, on the 14th of the same month, he paid the company's bankers a further 10s. per share, giving up his letter of allotment in ex-
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change for the banker's receipt acknowledging his title to and promising delivery of certificate for such shares; that nothing more passed until 14th May, 1866, between him and the company; that on that date, he and his solicitor had in their hands the whole of the document on which variance was relied for moving to be discharged from the register; that he could then have waived or rescinded but, instead of repudiating, though knowing the register held him out to the world, as a shareholder in and a member of the company allowed his son to hold communication with and influence the conduct of the directors on the footing of he (Lawrence Sr.), being a shareholder. This last was enough, Lord Cairns thought, to disentitle Mr. Lawrence.
What is the possible analogy between such a case under such an Act as the English Joint Stock Companies Act of 1862, and the facts set forth and this case under the New Brunswick Joint Stock Companies Act and the facts made to appear here?
It was in dealing with that May to September space of time that is put forth in respondent's factum as if, which it is not, the entire substance of the case and a test of time permitted after repudiation that Lord Cairns used in answering such contention as could be set up thereunder, the following language, I quote from pages 424 and 425 of the report:—
In considering this part of the case it is necessary to bear in mind the general scheme of the Act of 1862. No company can, under that Act, obtain a limit of liability for its shareholders except by registering a memorandum of association, which is the charter and limit of the powers of the company, just as the articles of association may be said to be its rules of internal government. A copy of these documents is to be forwarded to every member on his request, at a fee not exceeding Is. When registered they bind the company, and every member of it, as if each member had executed a deed with covenants to the effect of the provisions which
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they contain. On the other hand, the test, and the only test, which other members and the outer world can have of the membership of any particular person, is the entry of the name of that person on the register as a member.
******
In this register of members, Mr. Lawrence, by the form of his application for shares, expressly authorized his name to be entered and he must have been aware that, upon this being done, he would be held out to the world as a member of the company, whatever the form or substance of its memorandum or articles. He must be taken, in my opinion, to have known, either that the memorandum of the association was prepared and accessible at the time of his application, or that it must be prepared forthwith; and that, in either case, both it and the articles must, in their very nature, be documents differing widely in form and, in all measures of detail at least, going beyond the prospectus; and, with regard to documents of this description, on the mode of framing which consistently with the prospectus so much difference of opinion might well arise, it would, in my opinion, be contrary to the first principles of justice to hold that Mr. Lawrence was at liberty to remain wholly passive, content to trust to what was stated in the prospectus, and, while he knew that an authority to register his name and hold him out as a shareholder had been given and probably acted on, keeping himself in a position to ratify all that had been done if the) company turned out prosperous, but for the first time to inquire, and, if possible, to repudiate, should a financial panic come, or the speculation turn out unsuccessful.
The language I have quoted exhibits, as usual for him who used it, such a comprehensive grasp of the whole subject matter in all its bearings, and clear exposition of the law applicable to the facts I have recited, that, if it fails to bring home to any one the wide distinction between that case and this, I cannot hope to do so by any language of my own, when the respective facts of each case and the leading features of the respective statutes upon which each creation rested are borne in mind.
The beauty of the exposition is that, without dwelling upon any needless details, the lesson is so learnt as one reads that the reader sees how to expand the application of it without adding useless words.
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I have examined every case cited or that I have been able to find, to see if there ever was a case resembling this in its leading features, where a court, whose authority would bind us, ever, merely because of delay between repudiation and action, refused relief to a shareholder whose shares had been fully paid up and who repudiated within a reasonable time, but have found none.
There are cases indicating the contrary view of the law.
The case of The Directors of the Central Railway Co. of Venezuela v. Kisch, in appeal shews that the plaintiff allowed, after knowing of the fraud, two months to elapse before he moved and six months after he might have known, if he had been diligent, and though a shareholder liable for the part unpaid on account of shares, yet on appeal the House of Lords thought little of the question of delay then set up.
The cases of Oakes v. Turquand, sweeps out of the way, as authorities concerning us and calling for consideration on this point of delay, all those cases under the English Joint Stock Companies Act where an order for winding-up has been made or petitioned for; and the reasoning upon which it proceeds removes, in like manner, also all those cases wherein the shareholder had not fully paid up his shares, for no one could tell when the statutory obligation under those Acts in favour of creditors, might, in the course of business, become operative, and hence the necessity for that promptitude so repeatedly urged as necessary for those repudiating or taking action to rescind,
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if they desired to escape the operation of that statutory obligation or to be just to those becoming entitled to invoke it.
Among many important differences there is the essential difference of far reaching importance in this connection between the English Joint Stock Companies Acts and the New Brunswick Joint Stock Companies Act, that the register ever since 1862 was in England open to all the world, but in New Brunswick it was only open, as of right, to creditors and shareholders.
A man could not well complain of becoming a creditor on faith of any register where, until he became a creditor, he had no right to look at it.
There is exhibited in the drastic and comprehensive system of the English Act of 1862, and later Acts, a scope and purpose far beyond anything that appears in the limited field covered by the New Brunswick Act.
It is part of the scheme of the English Acts to work out the rights and liabilities of the subscriber for shares and those entitled to rely thereon, by holding the subscriber to the obligation he has undertaken unless he adopt the special and speedy method provided by the Act for getting rid thereof.
Such cases as Taite's Case, are only binding illustrations of time allowed for removal from the register by the means specified by the Act.
The same legislation or similar legislation creating similar conditions might give a value to such authorities which I do not conceive they have here where the conditions legislatively and in every way render the cases so different from what we have to deal with herein.
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There is no peculiar quality in the property in a share, once fully paid up, and no future liability on it, whereby we can differentiate the consequences of fraud inducing sale of it, and right of rescission arising therefrom, and those consequences in relation to any other property.
There always has been and always will be, as one property differs from another, a variation in the proper measure of time to be allowed for repudiation, and following repudiation, for application to the court to enforce it.
The perishable must differ from the permanent and the chances of change in ownership and development must give rise to such varying conditions and consequent varying obligations as to render it impossible to lay down any uniform rule.
There is no greater right in a corporate body, as such, or in one of the corporators, as such, to be protected from suffering or inconvenience arising from disappointments that the fraud of servant or agent creates than non-corporate persons have who endure the same.
The distinction made in some of the corporation cases arises from the greater risk run of injuring third parties.
The conditions that the cases of unpaid shares present under the English Acts are entirely different from the property in fully paid-up shares.
I wish to refer to some cases illustrating my meaning and my understanding of the law in this regard when applied to company cases where the statutory provisions do not form a leading element in the questions to be solved.
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Take the case of Clarke v. Dickson, where the dealing was not between the company and the subscriber for shares, but between private persons in relation to the buying and dealing with shares, when the contract of purchase was alleged to have been induced by fraud.
Lapse of time, though great, was not the special element that disentitled to relief, but the change in conditions was the bar on which stress was laid and coupled with that was the dealing of the purchaser with the property.
The case of Aaron's Reefs v. Twiss, is another illustration in a different way.
There the company had of its own motion removed, for non-payment of calls, the name of respondent as a shareholder. The Act provided that a shareholder, in such case, remained liable for such unpaid balances of purchase of shares subscribed for.
The company sued for the balances, and the defendant set up the fraud and succeeded, though he never, in fact, repudiated, except by his plea in answer to this suit. The dates are in this regard worthy of notice.
On the 27th of April, 1891, the shares were declared by the company to be forfeited, and, on the 5th of May, he was notified thereof. On the 27th of September, 1891, he was sued and on the 21st of December, 1891, the plea of fraud was filed.
It was argued there, as here, that he was too late, but, though the court found that he had been put on inquiry as far back as the previous March and, as a matter of fact, had formed a shrewd suspicion before the 6th of May, that he had been the victim of a fraud,
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the lapse of time was of no avail in answer to the claim for relief by reason of the fraud.
Lord Watson thought he and the company were, by the forfeiture of shares in May, remanded to the common law right of rescission. Lord Davey put the matter as follows:—
The company thereby severed the relation between themselves and the respondent as shareholder, and the respondent became a mere debtor to the company. It is not proved by any evidence. that the respondents had lost his right to repudiate at the date of the notice; and I think that, not having done any act to affirm the contract, he was not then bound to take any step for the mere purpose of getting rid of his liability to pay this call. But I am also of opinion that, if the appellants had intended to rely upon the delay, they ought to have cross-examined the respondent for the purpose of ascertaining when he learnt the facts, and to have asked for a direct finding of the jury on the subject.
Two observations are called for by this case.
Time in itself is not, when dissociated from the peculiar obligations arising from the statute, any more of a bar to repudiating for fraud a contract arising even out of a subscription for shares, than in any other contract.
The time here was, as I count it, no greater than there.
Another observation called for by that decision and remark is that in the defence herein no pleading set up the delay or laches, no contest was made at the trial over any such issue, no reason was asked for appellant's failure to move after he had repudiated the transaction.
No one, for the defence, seems to have thought of such a defence until at the close of the case, as a desperate resort the leave was asked to plead such defences.
Such evidence as, if attention had been called to it, might have been offered we are left to speculate on.
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But we find that the respondent swore incidentally to answering on other issues, as follows:—
Q.—Did you ever get a balance sheet shewing a statement of the assets and liabilities? A.—Never got a balance sheet from the day I took the stock to the present day. They never advised me of the meetings, or one thing or another; everything was done in a hole and corner; never got a statement shewing assets or liabilities or anything else.
Q.—Did you ever get a statement from them shewing their liabilities? A.—Never got anything from them; ignored me altogether.
And no reply is made to this evidence.
This is not all, however, for he wrote, as already stated, the defendant, Manchester, who was president of the company, a long letter on the 19th of March, 1904, in which the following passage occurs:—
There is a lot of other things I would like to tell you, but this will do for the present. I asked Mr. Elkin the other day for the minutes of the meetings held since I bought the stock, and the last annual reports, but he told me he did not have them, they were at the mill. I went there for them yesterday, but I found Mr. Mclntyre was indisposed and not able to be at his post. I told Mr. Elkin I did not want to go into law about the matter if I could help it. And now you will allow me to tell you that the only thing that keeps me hack from putting it in the court is the minutes and the reports. You do not deserve to get another note from me. I sent you three, and you treated me with a great deal of disrespect by not answering either of them. I always thought you were a man disposed to do what was right. This is the last time that I will address you on the subject if it costs me every cent I am worth I will have my money. I will follow you and Mr. Elkin to the end of your tether, and make you do what is right. If the stock is as valuable as represented to be, why not take it up yourself?
The only answer ever vouchsafed to this letter, containing so explicit a demand for inspection and explanation, is the following:—
St. John, N.B., April 13, 1904.
Michael Farrell, Esq.,
Dear Sir,—
At a meeting of the directors of the Portland Rolling Mills, Limited, held yesterday, your letter of March 19th was placed
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before the Board, and, on motion, "the president was instructed to write in reply to Mr. Farrell and notify him that the condition under which he took his stock have not been changed."
Yours truly,
James Manchester,
President, Portland Rolling Mills, Ltd.
The appellant ran a risk of pressing any further demand for leave to inspect, for to do so by virtue of his standing as a shareholder might have waived his repudiation, and his persisting further might have lent a colour to the argument that his doing so was as a member of the company.
Am I to assume he was not waiting developments of evidence as to subscription of stock by the directors in accordance with the representations?
One of the accusations made as corollary to the existence of stock holdings by directors is that the directors were to have taken up the balance of the new stock pursuant to an understanding. Suppose they had done so in May or June would he have had much to complain of on that branch of his case, even if so tardy fulfilment had been effected?
I do not think it lies in the mouth of a company that acted as this one did in its dealings with the appellant for one moment to complain of delay or laches, much less to seek the benefit of such a defence, if ever open, by such way of presenting it as this.
In addition to the remark of Lord Davey, I would call attention to the remarks at pages 240 and 241, in the judgment of the Privy Council in the Lindsay Petroleum Company Case, cited above, in regard to the necessity for pleading not only laches but the allegation of facts intended to be relied upon to support it, or shew the injury that has arisen to any one by reason of the imputed delay.
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The following sentence is, mutatis mutandis, applicable here.
In order that the remedy should be lost by laches or delay, it is, if not universally at all events ordinarily—and certainly when the delay has only been such as in the present case—necessary that there should be sufficient knowledge of the facts constituting the title to relief.
That the major part of the stock was not held by directors, the appellant may well be held as knowing from the 26th January, 1904.
But the important point, in that same connection, and the allegation of falsehood and fraud charged in relation thereto, as to the exact nature of the purpose or understanding as to future taking up of the balance of the same issue by the directors, as that of which the appellant has bought part, could only be effectually got at by an inspection of the minute books and stock books.
The same may be said as to the real financial condition in preceding years, and the allegations relative thereto.
The appellant, in his impetuosity to repudiate, possibly had not fully considered the necessity for thus arming himself, and I think, in face of respondent's way of treating him, he was well warranted in taking time after the 13th of April, 1904, to discover elsewhere or otherwise, the evidence before launching on a sea of litigation.
The case, though arising out of a sale of stock, presents few of those characteristics that differentiate the usual stock cases cited from others regarding fraud entitling to rescission, so as to render each day's delay strong evidence of that promptitude justice in some cases demands.
The company was a kind of close corporation with
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less than a dozen shareholders when it was decided to offer the new stock and so little of that was sold that I doubt if any changes in ownership of it took place between April and December, 1904, save to those well informed as to this claim as well as all else bearing on the state of the company.
The burthen rested on those setting up such an equity to plead it and prove it; at least primà facie.
The financial condition of the company was probably in fact quite as good when this suit was begun as on the previous 13th of April.
No change for the worse can be said to have operated on the appellant's mind in the way that seems to have happened in some cases.
I cannot find anything to have intervened during the alleged delay in bringing the action that would have entitled any third party to complain of relief being given as of 22nd December, 1904, instead of the 14th of April, preceding.
The circumstances I have adverted to as possibly excusing more prompt action seem, when coupled with default in properly raising the objection to furnish an excuse, quite as potent as in the Aaron's Reefs Case or the McNeill Case, to repel any objection on the score of laches when absolutely no evidence of acquiescence.
In the absence of authority, to hold mere delay itself, after clear express repudiation of a fully paid-up stock a bar, I can see no reason in accord with well understood principles for refusing the relief prayed for here as against the company.
Then, is there a case made against the defendant
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directors? Is there one upon which we can properly reverse the learned trial judge's finding of fact?
I do not think so. It seems to me, without being held bound to all he may have said, that he was guided in his consideration of the evidence applicable to the case as against these individual defendants, by a correct appreciation of the law by which they should be tried.
The quotation he adopts from Lord Chelmsford's judgment in Peek v. Gurney, at page 390, seems supported by the authorities so far as applicable to this case.
The agent, employed by these directors by virtue of the resolution entrusting to them the disposal of these shares, by his acts bound the company. That the learned judge found, and I have adopted. It does not follow as a matter of course, that directors, appointed by and on behalf of their company to select an agent, are personally responsible for all that agent does.
No case is made on the evidence that the agent engaged was so untrustworthy or likely to resort to improper means that defendants ought to have been on their guard.
I attach no importance to his marking the prospectus as "private." Whatever he called it, I would call it the act of the company.
Even suppose it were so, and the issue of a prospectus was a thing likely to have happened, as within the scope of his authority, does it necessarily follow either that it assuredly would issue, or that the agent in issuing it would act dishonestly?
The transaction was not so large a one as to render
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resorting to the circulation of a printed prospectus a certainty or as almost certain to occur.
Nor could any one bold as a matter of law these directors liable for wholly unauthorized verbal representations.
Then, does the evidence of knowledge of these directors of the issue and contents of the prospectus change their liability?
Had it been clear that they or either had been aware, before the sale to the appellant, of the use of this prospectus, I should have been disposed to hold as guilty him knowing the use to which his authority was being put, and who, so knowing, refrained from at once withdrawing the prospectus and, if need be, the authority of one so abusing it, and to have held him liable to answer for the consequences.
The dates when each of these directors knew of the prospectus, (and I would not be disposed to distinguish as of course the date of knowing of it from the date of reading it), and of the sale of the stock and of the receipt by the treasurer of the company of the purchase money from appellant are all left quite uncertain.
Some of the most important of these dates could easily have been fixed. It is not fair either to the accused or to the court in a trial of this kind to leave such things uncertain.
The court might suspect or speculate but could not act thereon. In this case, if the court impressed by the manner and other things that lead to distrust a witness, had inferred from some parts of the evidence a basis of fact against the defendant Elkin, and been led by such an inference, coupled with what I am about to advert to, had found against him, I do not
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know that I should have felt at liberty to disturb the finding.
Manchester's case seems entirely different, in regard to these matters that appear in Elkin's case.
As to both, however, there stands on record an apparent neglect of duty such as (if authority be needed), Lord Chancellor Hatherly asserted in Reese River Mining Co. v. Smith, at page 74, was imposed on directors where a repudiation was made of sale of right to shares on the ground of fraud.
It was the plain duty of the directors, including these specially connected with the agent accused, to have investigated such a charge of fraud, and, if the charge made proved well founded, to have agreed to rescission at once.
Elkin's own judgment upon such a case, from what he tells as having passed between him and the agent, should have been quite enough.
He realized the impropriety of the representations made. Why did he not succeed in cancelling such a transaction? He was, as the evidence shews, clear sighted enough to know the impropriety of resting a sale of stock on such a basis.
Again the appellant has failed to present the evidence of what took place at the board meeting or meetings which led up to Manchester, the president, writing the letter of the 13th of April. If the proper spirit that Elkin evinced when the prospectus was shewn him had prevailed, as it should have done, that letter never would have been written.
But, should I, sitting in appeal, even if I could infer either of these men were at the board meeting
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that adopted the defiant tone and directed this letter, couple that with other evidence and find them liable?
I think not. I have referred to these things at length instead of contenting myself with simply adopting the conclusion of the learned trial judge, relative to the director defendants, because they shew that there was a case for investigation which rendered it proper to make these two directors parties defendant.
They have been given their costs below. I might not have thought they were entitled to them in the view of what I think was their duty on learning of this complaint.
They had a chance to shew they were overborne and have not done so. But as we do not, as a rule, interfere with the disposition of costs the court below has awarded, unless incidentally, to a reversal, the judgment of the court below in regard to these costs must stand.
They succeed here and are entitled to their costs of appeal. But I do not think they should be taxed costs here or in the courts below beyond what were necessarily incurred in their own personal defences. I do not find in the case any answer was made by defendant Elkin—but assume he had nevertheless some costs of defence.
The general costs of the cause throughout, and of the appeals, must be given the appellant as against the defendant company, save as to such parts thereof as were occasioned by the making of the directors defendants to the cause and to the appeals.
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Appeal against the defendant company allowed with costs.
Solicitors for the appellant: Stockton & Price.
Solicitor for the respondents,
The Portland Mills Rolling Co.: A. H.Hanington.
Solicitor for the respondents,
Manchester and Elkin: M. G. Teed.
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