Case Name: Teacher v Calder
- Court: House of Lords
- Judgment Date: 24 July 1899
- Citations: [1899] AC 451, (1899) 1 F (HL) 39, [1899] UKHL 1, (1899) 7 SLT 153
- Judges: Lord Watson, Lord Shand, Lord Davey
- Legal Areas: Contract Law, Arbitration, Business Agreements
Background of the Case (Teacher v Calder)
In 1889, Adam Teacher, a wine and spirit merchant, entered into a financial agreement with James Calder, a timber merchant, to provide financial assistance for Calder’s business (Calder & Co.). Teacher agreed to loan Calder £15,000 and to act as a guarantor for an additional £20,000 from the Commercial Bank of Scotland.
Calder agreed to pay 5% interest on the loan and an additional percentage based on profits (3/8 of the net profits).
The agreement stipulated that the firm’s books would be audited annually by a designated accounting firm (McClelland, Mackinnon & Blyth), and the auditors’ certification would be final in determining profits.
Key Issues that arose
By 1894, disputes arose regarding the accounting and profit distribution.
It was claimed the accountant conducting the audit (Mr. Gairdner, a partner in the accounting firm) was unaware of the agreement’s full details. He failed to consider the terms of the agreement while conducting audits.
Further, it was claimed that certain accounting errors (such as bad debt write-offs, depreciation, and stock valuation) led to a misrepresentation of profits, reducing Teacher’s entitled share. It was also claimed that Calder breached the agreement by withdrawing capital from Calder & Co. for use in other businesses.
The lawsuit sought an accounting of profits, revision of audits, and damages for breach of contract.
House of Lords’ Judgment in Teacher v Calder
1. The Court found that Mr. Gairdner (the auditor) was unaware of the agreement’s terms, especially that his audits were to be final and binding. Since the contract required audits to be conducted with full knowledge of the agreement, the House of Lords set aside the audits and ordered a fresh accounting of profits. The accuracy of the audits was questionable.
2. The Court rejected claims that Calder had engaged in fraud or deliberate misrepresentation. While there were errors in the accounting process, they were not the result of fraudulent intent.
3. Calder had withdrawn capital from the business without Teacher’s consent, breaching the contract. However, since the business was still profitable and the loan had been repaid, the court awarded only £250 in damages, rejecting claims for higher compensation.
Final Decision
Audits Invalid: The financial accounts must be reviewed properly.
Fraud Not Proven: No fraudulent misrepresentation by Calder.
Damages Limited: £250 were awarded for breach of contract.
Significance
This case remains an important legal precedent in contract law. It clarified that an audit cannot be considered final if the auditor is unaware of key contractual terms that affect their judgment. The case reinforced the principle that an auditor’s certification is only final and binding if they act with full knowledge of the contractual terms.
Full case reference:
https://www.bailii.org/uk/cases/UKHL/1899/1899_1_F_HL_39.html
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