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The Pamphlet Collection of Sir Robert Stout: Volume 84

The History of the 4,000 Telephone Contract

The History of the 4,000 Telephone Contract.

We think we cannot, do better than give you Sir Julius Vogel's own words on this subject, taken from a document

May, 1882.

which he laid before the Board—
"The history of this transaction is rather lengthy. It

Feb, 1881.

dates so far back as when the prospectus of the Oriental Telephone Company was just issued. Immediately thereafter, Mr. Gower published in the papers that he possessed certain rights in the Oriental countries. Negotiations ensued to acquire those rights. I myself negotiated with Mr. Grower to acquire all his rights for the purpose of forming a Consolidated Company like the present one. These negotiations could not be hurried on. Meanwhile the Oriental Vendors were anxious to enable the Directors of the Oriental Company to allot, they having positively refused to do so unless Mr. Grower's rights were first extinguished. The idea at that time was that the Oriental Company, like the United Company, would co-operate with the Consolidated Company, and that the Consolidated Company would have bought out Mr. Grower's rights for the benefit of the Oriental Company, as they did for the benefit of the United Company. However, as I have said, time pressed and Colonel Gouraud, Mr. Cargill and Mr. Bigelow made an arrangement with Mr. Gower by which they undertook to take 4,000 Telephones at Post Office prices. Immediately Mr. Gower got this undertaking from the vendors, he became very indifferent to carrying out the arrangement for the Consolidated Company, and finally broke off the negotiations; and in explaining why he did so he told me he had obtained, through his negotia- page 7 tions with the Oriental vendors, a contract which he estimated at at £220,000 in value to himself. He subsequently brought out a company to purchase his rights and asked a very large sum, amongst his assets reckoning this very contract. Through the intervention of the late Mr. A. Scrimgeour the proposed company was dropped, and the present Consolidated Company formed. Before the prospectus was brought out, Colonel Gouraud endeavoured to make an arrangement for extinguishing the contract with the Oriental vendors. Mr. Morris (Ashurst, Morris, Crisp, & Co.), however, advised that it was impossible for such a thing to be done, as Colonel Gouraud was acting in a fiduciary character as a Director of the proposed company, and could not be a party to making away with a valuable asset. The Consolidated Company was formed, and amongst the other things it acquired from Mr. Gower was this contract for 4,000 instruments. This is briefly the history of the transaction up to the formation of the Consolidated Company. The Directors are as well aware as I am of the history of it since then. Briefly it is this, we never could get any answer from the vendors, and they were only 'brought to book' when they found they could not get their money from the Oriental Company, because they could not offer Mr. Gower's rights. In order to obtain these rights and hand them over to the Oriental Company, they formed a company which guaranteed the performance of the contract, and to which we gave a certain recognition, but without releasing the original parties from their contract with us. This new company made one payment in order to obtain the papers and documents so as to enable the Oriental vendors to procure payment from the Oriental Company. When the next instalment became due, the Secretary to the Company wrote a note repudiating the engagement upon the most flimsy pretext, viz.:—'That there had been some intimation received from the United Company.' Whether or not there was such intimation mattered not to us; and, as the matter page 8 stands, it would seem that this company was formed or the purpose of getting securities out of our hands and then throwing up the matter. Under these circumstances the

May, 1882.

board came to the conclusion last week that there was no option but to promptly and vigorously institute legal proceedings to enforce the Company's rights, and this is to be done with the utmost promptitude."

The price to be paid by the Oriental Telephone Company, originally for purchase of the rights and patents of the Edison party, for whom Col. Gouraud, Bigelow and Cargill were acting, was £50,000 in cash, and £100,000 in fully paid shares; but somehow this seems to have been reduced, owing no doubt to the questions raised by Mr. Gower, as only £40,000 in cash, and £75,000 in shares was given for the joint patents.

The Company alluded to by Sir Julius Vogel was the Telephone Supply Company, Limited, which was registered on the 10th January, 1882, with a capital of £50,000 in £10 shares, the Shareholders being:—
Cargill 198
Cheston 1*
Cheston 1
Hubbard 299
McLeod 1
Bigelow 100
Edison 200
Gouraud 197
Grigg 1
Kingsbury 1
Allen 1
On the 5th June, 1882, a proposal was made by Colonel Gouraud and Mr. Bigelow without prejudice—

"Ihat the Consolidated Telephone Company transfer the responsibility of the 4,000 Telephone Contract from the vendors personally to the Telephone Supply Company, page 9 which has a subscribed capital of £10,000; the vendors agreeing to work the Supply Company to the advantage of the Consolidated, and fighting the United Telephone Company, if necessary."

On the back of this document the following was written :—

"Arranged by Sir Alexander Armstrong, Mr. Bigelow, and Mr. Carnegv."

Two Hundred Telephones were delivered to the Telephone Supply Company by the Consolidated, and £1,800 paid for them. No further deliveries took place, and apparently the purchasers and the Telephone Supply Company then raised the unfounded contention that the United Company alleged that the Telephones could not be used in the United Kingdom, and on that ground objected to complete the contract.

(As Colonel Gouraud had throughout taken a very active part in all arrangements between the United and the Consolidated Companies, he must have known that such contention was entirely without foundation.)

An action was then commenced against Messrs. Gouraud, Bigelow, and Cargill, to enforce the contract.

On the 18th August, 1882, Mr. Maton (Messrs. Mackrell, Maton, & Co., solicitors) wrote a long letter to the Consolidated Board, giving the result of a conversation with Colonel Gouraud, who argued that the attempts to enforce the 4,000 Telephone Contract was the chief reason of the hostility of the United, but it was pointed out to him that the United had never put this forward as a reason for disagreement.

Colonel Gouraud, in reply, stated nevertheless that it was a feet, and that he was now in a position to propose that a page 10 sum of £5,000 be paid to the Consolidated and the contract cancelled. He further stated that it was an extremely difficult matter to deal with all the various interests in the 4,000 Telephones, but that, "for the present week," he had them all in his control, and that if his proposal were at once accepted and the question settled he should be prepared (in the event of further difficulties occurring with the United in the matter) to resign his seat at that Company's Board, and side with the Consolidated as against the United.

The aforesaid action was compromised by the United Telephone Company paying to the Consolidated the sum of £5,000, and £250 was paid as interest. The agreement under which this settlement was made contains no statement that the United Company dispute the right of the Consolidated Company to supply the Telephones to be used in the United Kingdom; on the contrary, it recognises the fact that the benefit of the agreement of the 4,000 Telephones was reserved to the Consolidated Company by the agreement of the 8th April, 1881.

The Agreement of Settlement states : "It is considered by the United Company that the use of the 4,000 Telephones as free Telephones in the United Kingdom would be prejudicial to the interests of that Company, and they have accordingly agreed to pay the sum of £5,000 in consideration of no part of the 4,000 Telephones being used within the United Kingdom."

On the 6th September, 1882, a letter from Messrs. Mackrell, Maton, & Co. was received, enclosing the first instalment of settlement, and asking the Consolidated Company to send a letter to Messrs. Gouraud, Bigelow, and Cargill, stating that the agreement had been signed by the United Company and that the Telephone Supply Company "could now be wound up."

On the 17th September, 1882, a letter was received from page 11 Mr. F. A. Grower stating that this compromise did not meet with his approval, and asked for a distinct and formal resolution of the Board, requesting him to sign certain documents.

On the 3rd October of the same year, Mr. Mays (one of Mr. Gower's associates) wrote, threatening an action against the Directors to restrain them from carrying out the 4,000 Telephone settlement; and his solicitors (Messrs. Davis and Co.) in a letter to the Consolidated on the 17th October, write—"You are aware that Mr. Mays knew all the circumstances under which the contract was made with Mr. Cargill and others, and is of opinion that nothing has occurred since to justify the compromise," and further they ask for "facts to justify the compromise," and demand a special Meeting of shareholders to be called to consider the question of carrying it out. In the meanwhile, however, Mr. Gower had written to Mr. Mays, advising him not to go on with the action, as it might injure the Company for years, if not destroy it altogether.

On the 6th October, 1882, Mr. Maton (Messrs. Mackrell, Maton, & Co., solicitors) wrote to Mr. Gower, "The Board are perfectly satisfied that the arrangement which they have made with reference to the 4,000 Telephone compromise, is, under the circumstances of the case, in the best interests of the shareholders; " and on the 8th October, in reply, Mr. Gower writes expressing dissatisfaction with the settlement, and mentions his repeated statements of facts which had proved to be of no service in preventing, what seemed to him, the sacrifice of the Company's interests.

On the 26th October, Mr. Maton wrote to the Consolidated that he had seen Mr. Mays, and had, in confidence, explained some of the reasons which led the Directors to assent to the compromise.

Messrs. Davis (Mr. Mays' solicitors) then advised him not to pursue the threatened action, as he could not succeed unless he could prove "malâ fides " on the part of the Directors, and thereupon Mr. Mays withdrew.

Your Committee, in reply to their enquiry of Mr. Maton for the reason of the compromise, have received the following letters:—

page 12
21, Cannon Street, London, E.C.,

C. L. W. Fitz-Gerald, Esq.

Dear Sir,

4,000 Telephones.

Since our interview with you a few days ago, we have refreshed our recollection on this matter.

When the Oriental Company applied for an assignment of the patents in the early part of 1882, negotiations took place between the Consolidated Company and Messrs. Gouraud, Bigelow & Cargill, and ultimately an arrangement was made under which Messrs. Gourand & Co. were to take and pay for an immediate delivery of 200 Telephones, and agree to take the remainder at an increased rate of delivery; the Telephone Supply Company, to whom they assigned the benefit of the contract, guaranteeing the performance of the contract.

Mr. Gower and his associates then, at the request of the Consolidated Company (who had been advised that the assignment could not be withheld), assigned the Oriental patents to the Oriental Company at the expense of Messrs. Gouraud & Co.

The Consolidated Company received £1,800, and the 200 Telephones were, we believe, never removed from the warehouse of the Consolidated Company.

In the following May an action was brought by the Consolidated Company against Messrs. Gouraud & Co., claiming performance of the contract for the supply of Telephones, and terms of settlement of this action were approved by the Board of the Consolidated Company in August, 1882, after the determination of the Post Office contract, and eventually carried out. Under this arrangement the Consolidated Company retained the £1,800 they had received, the 200 Telephones were handed back to them, and £5,250 in cash was also paid to them. page 13 We should perhaps point out that the rights of Mr. Gower in the Oriental District consisted of the benefit of the contract for the supply of 4,000 Telephones at a price which might vary.

Yours faithfully,

John Mackrell, Maton & Co.

Not considering this letter satisfactory, we demanded further reasons for the compromise.

21, Cannon Street, London, E.C.,

C. L. W. Fitz-Gerald, Esq.,

4, Hercules Passage, Threadneedle Street.

Dear Sir,

We have delayed replying to your letter to our Mr. Maton until our Mr. Godlee's return to town.

The letter to which you refer us, as you will obsrve, states that we explained to Mr. Davis, Mr. Mays' solicitor, "some" of the reasons which had led the Directors to assent to the terms. We can only state of course the reasons, so far as they were known to us, and necessarily, after an interval of two years, some of these may have escaped us. We must ask you, therefore, to take this letter with that explanation.

It would perhaps, however, save trouble if you would refer to our letter to you on the 7th July last, in which we explained to you the course which events took and some of the considerations affecting the matter. You will recollect that at the time immediately prior to the settlement the relations between your Company and the United Company were in a very strained position and in any negotiations with the United Company the question of these 4,000 Telephones was constantly raised as a preliminary difficulty which must be got rid of. Their anxiety in the matter is best shown by their providing so large a proportion of the £5,250 agreed upon in settlement.

The United Company, moreover, suggested that it had been intended that these 4,000 Telephones should be used in the Oriental district alone, and this view they stated themselves prepared to contest in Court, although the Consolidated Company did not consider it well founded. It must, however, be evident that a direct rupture between the United and Consolidated Companies would have been almost dangerous thing for your Company.

page 14

Assuming, however, that the Telephones could have been supplied without restriction, you will observe that two difficulties presented themselves, either they would be delivered in England, the result of which would be an immense increase in the difficulty of discovering unlicensed instruments and a serious interference with the defence of the patents, which your Company acts under and with the business of the United Company, one of your largest customers. On the other hand, they might have been delivered in the River Plate or the Oriental district where your Company supplies instruments, which would simply have been a deduction from the number otherwise supplied by your Company. Their delivery in North America is scarcely a probable result, having regard to the prices ruling there.

A further question existed as to the price at which these instruments were to be supplied by your Company. You will observe that this was to be the same price as Telephones supplied by your Company to the General Post Office "at the time being." The Post Office agreement, as you will recollect, was determined on the 17th June, 1882, and no price could therefore be said to be fixed at the time these matters were under discussion. What the actual profit would have been, taken even at the Post Office price during the first 12 months, we have no means of knowing, but this will be doubtless familiar to you.

The terms of the settlement besides this provided the Company with ready money, which we believe was of importance to them at this time. How far £5,250, together with the £1,800 previously received and the retention of 200 Telephones represented the probable profit, we are not able to judge. You will of course recollect that before this time the patents were in the possession of the Oriental Company, the form of the contract itself making it, we think, plain that these patents were to be handed over forthwith and not at the expiration of the contract for the supply of Telephones.

These are some of the reasons, and we think you will agree very cogent ones, which we believe led the Board to adopt the course they did in settlement of the action against Messrs. Gouraud, Bigelow & Cargill.

Yours faithfully,

John Mackrell, Maton & Co.

In conclusion, your Committee would state that the foregoing facts have been laid before counsel, and his opinio is appended.

* Those marked were the Signatories to the Articles of Association.