THE JUDICIAL COMMITTEE.

REX V. THE GRAND TRUNK PACIFIC RAILWAY COMPANY.1

A question between the Government and the company involving an amount greater than $13,000,000 depended upon the construction of a clause of an agreement between the parties. The Supreme Court of Canada decided unanimously in favour of the Government. The Judicial Committee reversed the decision. I now submit the point to the profession, believing that if there can be any difference of opinion as to the true construction of the agreement, there can be none as to the validity of the only reasons assigned by their Lordships in support of their view. Observing that the documents to be quoted dealt with the western division of the railway only, let us look at the relevant clauses of the documents:-Section 28 of the first agreement (29 July, 1903), is as follows:

"For the purpose of aiding the company in the construction of the western division, the Government shall guarantee payment of the principal and interest of an issue of bonds. to be made by the company for a principal amount equal to seventy-five per centum of the cost of construction of the said division, as defined and ascertained in accordance with the provisions of paragraph eighteen hereof.

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Other clauses of the agreement may be summarized as follows:

34. The Grand Trunk Railway Co. was to "guarantee bonds of the company for the balance required for the construction of the said western section."

35. The company was to create a first mortgage to secure payment of the bonds guaranteed by the Government, and a second mortgage to secure payment of the bonds guaranteed by the Grand Trunk.

Owing to depression in the money market, the company soon discovered that the proceeds of an issue of guaranteed bonds to the face value of the amount of "75% of the cost of construction" would not equal 75% of that cost-the bonds would not sell at par. In view of this fact a further agreement (18 February, 1904), provided (inter alia) as follows:

1 Hereinafter called the company.

"Notwithstanding anything in the said contract contained, the Government may and shall . . . implement for the purposes and subject otherwise to the provisions of the said contract, its guarantee of the bonds of the said company to be issued for the cost of construction of the said western division, in such manner as may be agreed upon, so as to make the proceeds of the said bonds so to be guaranteed a sum equal to seventy-five per centum of the cost of construction of the western division ascertained as provided in the said contract. . . "

It was the construction of this clause that was disputed by the parties: The company claimed that the Government had agreed to hand over in cash or its equivalent, the difference between the sum realized by an issue of bonds to the face amount of 75% of the cost of construction, and 75% of the true amount of such cost-that is, that the Government would pay in cash the discount on the issue of the bonds. And the Government contended that its agreement was to ́implement . . . its guarantee of bonds

so as

to make the proceeds of the said bonds" equal to 75% of the cost-that is, that the Government was not to pay cash but to guarantee more bonds.

The company had a difficult case. The original agreement provided for governmental assistance by a guarantee of bonds to an amount which afterwards appeared to be inadequate; the second agreement provided for implementing the guarantee so as to produce an adequate sum, and the company contended that that meant a subsidy-in cash or its equivalent. The transition from guarantee to subsidy appears, at first sight, to be almost impossible, and the Supreme Court said as follows:

"We had no hesitation in reaching the conclusion that the extended liability the Government agreed to assume by the agreement of 1904 was a secondary liability only and not a primary one. The result of such holding was of course that the only liability of the government was to guarantee bonds of the company the proceeds of which would produce a defined amount."

The language of the agreement appearing to indicate not subsidy but further guarantee, it may be thought probable that the Judicial Committee would have so held but for two curious misapprehensions into which their Lordships

appear to have fallen. It is to these alone that I confine my criticism. Their Lordships said:

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"With the utmost deference their Lordships are unable to accept the interpretation placed by the Supreme Court on paragraph 5. It would be a breach of faith with the Grand Trunk Railway Company to let in any further charge in priority to their security; and, as it appears to their Lordships, the company has no power to issue bonds other than those authorized by the original contract."

First as to the breach of faith with the Grand Trunk Railway Company: Under the first agreement, the Government was to guarantee a certain fixed amount of bonds, and the Grand Trunk Railway Company was to guarantee a second issue of bonds "for the balance required for the construction of said western division." A change, in this arrangement, therefore, by which the first issue was increased, would be beneficial and not injurious to the Grand Trunk Railway Company, for (1) the amount of the second issue (which it was to guarantee) would thereby be reduced; and (2) the company for which it was becoming guarantor would be saved the difference between the selling price of bonds guaranteed by the Government on the one hand, and by the Grand Trunk Railway Company on the other. In other words, increasing the amount of the first issue of bonds would "let in a further charge in priority to their security," but it would, at the same time, correspondingly reduce the amount of their liability and risk. Every second mortgagee with unsafe security would be pleased if the first would take over some of his advances-more particularly if the effect would be to improve the financial position of the mortgagor.

That is one answer to the suggestion of a breach of faith with the Grand Trunk Railway Company, but the second answer is, if possible, still more conclusive. It is this, that the same agreement which contained (inter alia) the implementing clause, provided also (paragraph 12), that both of the agreements were to be "ratified by a general meeting of the shareholders of the Grand Trunk Railway Company;" and that they were so ratified. The implementing provision, therefore, whatever its true construction, could not be a breach of faith with the Grand Trunk Railway Company, for that company agreed to it-almost certainly, very gladly agreed to it.

The second reason given by their Lordships indicates still stronger misapprehension of the whole case. Their Lordships said that "it appears to their Lordships, the company has no power to issue bonds other than those authorized by the original contract."

The authority of the company to issue bonds is not in the original contract at all. It is in the company's charter. The contract presupposes authority to issue bonds and provides for the guarantee of some of them by the Government and of others by the Grand Trunk Railway Company.

That is one answer. A second is this, that nobody ever suggested that the company should issue "other bonds than those authorized by the original contract." All that was proposed and agreed to was that of the same aggregate amount of bonds, the Government should guarantee more, and the Grand Trunk Railway Company less than as originally contemplated.

Respectfully, I submit that the reasons given by their Lordships are based upon very unfortunate misapprehension. And perhaps the presumption would not be unfair that had their Lordships not been influenced by these reasons, the view which regards the statute as a provision for implementing the guarantee and not as providing for a grant of money would have been declared to be the correct construction. Upon that, however, I do not now insist.

When, in 1871, some of the Australian colonies were suggesting the abolition of appeals to London, their Lordships offered, as one of the reasons for the retention of the practice, that: It removes causes from the influence of local prepossession." Their Lordships did not intend any slur upon the rectitude of colonial Judges. They had in mind the unconscious but powerful influence of personal sympathies upon the mental processes of human beings everywhere. And speaking in the same carefully guarded and perfectly respectful way, I take the liberty of suggesting whether it is not possible that their Lordships may not sometimes be unconsaiously inclined to accept arguments which support the interests of British bondholders and shareholders rather than those which appear to militate against them.

JOHN S. EWART.

THE JUDICIAL COMMITTEE.

KELLY V. KELLY.

The managing partner of a firm of contractors, in Manitoba (call him A), drew more money from the firm's account than he was entitled to; used it (without the knowledge of his co-partners) in a variety of speculations for his own. benefit-stocks, land-warrants, wheat, real estate, &c. (all outside the scope of the partnership purposes); made profits on some and losses on others of the transactions-what are the rights of the parties?

1. Are the transactions (because the product of partnership moneys) necessarily the transactions of the firm? In other words, does the firm take the profit and stand the loss -no matter which it happens to be? Do not say no too emphatically.

2. Or are the co-partners (call them M. and N.) merely entitled to a return of the money and, meanwhile, to a lien by way of security upon the properties purchased?

3. Or are M. and N. entitled to adopt the profit transactions, and to leave the losses to A.? This last might be reasonable, but, for the purposes of this article, we may say that it is not the law. The statement would be true of the dealings of A. with the firm's "property, name, or business connections" (for example, the employment of the firm's ships or horses). But it does not apply to money; for that he has not employed, but taken; and it may be charged against him.1 At all events, whether you agree with this or not, it has nothing to do with Kelly v. Kelly. That case involves consideration of the first two questions.

In their statement of claim, M. and N. alleging that A. had, without their consent, used the moneys of the firm "in private speculations and ventures of his own," asserted a right to share in the profits derived from the transactions. In support of that claim, they cited the Manitoba Partnership Act, sec. 24:

1 Sec. 32 of the Partnership Act provides as follows:-" Each partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership, or from any use by him of the partnership property, name or business connections."