Cox v Hickman
Rule established
Sharing of profits is not conclusive evidence of partnership; the true test is whether there is mutual agency between the parties
Facts
- A trading firm was in financial difficulty and could not pay its creditors
- The firm's creditors entered into a deed of arrangement
- Under the deed, the business was assigned to trustees who would manage and continue it
- Profits were to be distributed among creditors in proportion to their debts until all debts were discharged
- A third party (Cox) who dealt with the business sought to hold the creditors liable as partners
- Cox argued that since the creditors shared profits, they must be partners and jointly liable for debts
Issues
- Whether persons who share in the profits of a business are necessarily partners in that business
- What is the true legal test for determining the existence of a partnership
Held
- The House of Lords held that sharing profits is not conclusive evidence of partnership. The earlier rule from Waugh v Carver (that sharing profits made persons partners) was overruled. The true test is whether there is a mutual agency: i.e., whether the business is carried on by or on behalf of the alleged partners with authority from each to bind the others.
- The creditors in this case had not authorized the trustees to act as their agents in carrying on the business; they were merely recipients of profits as a mode of debt repayment.
Ratio Decidendi
The sharing of profits, while prima facie evidence of partnership, is not conclusive. The true test of partnership is mutual agency, whether the business is carried on by all or any of the persons concerned acting for all. Without this relationship of mutual agency, mere profit-sharing (whether as creditor, employee, or annuitant) does not constitute partnership.
How to use it in an exam
- Use this case when distinguishing a company from a partnership and when discussing the essential elements of partnership. It establishes that sharing profits alone does not make persons partners: the mutual agency test must be satisfied. This is relevant in answers comparing the features of a company (no mutual agency among shareholders) with a partnership.
- Key quotable line: "Sharing of profits is not conclusive of partnership; the true test is mutual agency."
Source
Source: House of Lords
This is an educational summary, not the judgment itself. Cite the reported version in professional or academic work.