Also known as: Lister & Co v Stubbs
Court: Court of Appeal
Judgment Date: 5 May 1890
Where Reported: (1890) 45 Ch. D. 1; [1890] 5 WLUK 12
Legal Issues in Lister v Stubbs
Lister v Stubbs focused on the legal issue of whether an employer (plaintiff) could claim ownership over secret profits (including commissions or bribes) obtained by an employee (defendant) from third parties in the course of his employment.
The key question in Lister v Stubbs was whether these profits, which the employee had invested, could be treated as the employer’s property, thus entitling them to an injunction to prevent the employee from dealing with these investments, or requiring him to bring them into court​​​​.
Material Facts in Lister v Stubbs
Lister & Co, a silk-spinning, dyeing, and manufacturing company, employed Stubbs as a foreman dyer.
Stubbs was entrusted with purchasing materials for the company and, unbeknownst to Lister & Co, received significant commissions from Varley & Co, a supplier.
Between September 1881 and March 1890, Stubbs received £5541 5s. 1d in commissions, which he partially invested in real estate and other ventures.
Upon discovering these secret profits, Lister & Co sought to recover the funds, claiming that the money paid to Stubbs rightfully belonged to them.
They moved for an interlocutory injunction to restrain Stubbs from dealing with the invested real estate and for an order directing him to bring the other investments and cash into court​​.
Judgment in Lister v Stubbs
The Court of Appeal affirmed the judgment of Stirling J., ruling against Lister & Co.
The court held that the relationship between Stubbs and Lister & Co was that of debtor and creditor, not trustee and cestui que trust. Therefore, the plaintiffs were not entitled to the order they sought.
The court concluded that the secret profits received by Stubbs could not be treated as the property of Lister & Co until a judgment or decree established such a claim.
The court also rejected the notion that Stubbs was under an obligation to provide security for the alleged debt until it was established by judgment or decree​​​​.
Reason for the Decision in Lister v Stubbs
The decision was predicated on the legal distinction between funds held in a fiduciary capacity and those obtained as a result of a corrupt bargain.
The court noted that if Stubbs had received the funds directly from Lister & Co to be applied for a specific purpose, he would have received them in a fiduciary capacity.
However, since the funds came from a third party (Varley & Co) as a result of a corrupt bargain and not from Lister & Co, they were not considered to be held in trust for Lister & Co.
The court’s reasoning was influenced by previous cases, notably Morison v Thompson and Metropolitan Bank v Heiron, which dealt with similar issues of secret profits and fiduciary relationships.
The court maintained that while Stubbs was liable to account for the profits made in the course of his employment, this did not automatically make the funds Lister & Co’s property.
It was emphasised that the secret profits became a debt owed by Stubbs to Lister & Co due to the corrupt nature of the transactions, but not property belonging to Lister & Co.
The court was wary of setting a precedent that would allow employers to claim ownership of all profits made by employees in the course of their employment, regardless of whether those profits were obtained legally or through corrupt practices​​.
Legal Principles in Lister v Stubbs
Lister v Stubbs established important legal principles regarding the treatment of secret profits obtained by an employee.
Lister v Stubbs clarified that such profits do not automatically become the property of the employer.
Instead, they are treated as a debt owed by the employee to the employer if obtained through corrupt means.
This distinction is crucial in determining the rights of employers over profits gained by their employees, particularly in cases involving secret commissions or bribes.
The ruling underscores the importance of the source and nature of funds in determining their legal status and who has rightful claim over them.
This case is significant in shaping the legal framework surrounding fiduciary duties, secret profits, and the principles governing the relationship between an employer and an employee in the context of corrupt transactions.
