CA251/05
JUDGMENT
OF
SHERIFF PRINCIPAL
JAMES A TAYLOR
in the cause
John Forster
PURSUER/APPELLANT
against
Messrs Ferguson & Forster & Others
DEFENDER/RESPONDENTS
GLASGOW,
February
2008.
The Sheriff Principal, having resumed
consideration of the cause, Allows the appeal; Recalls the interlocutors of 17
March 2006, 4 April 2006, 3 May 2006, 29 November 2006 and 4 December 2006;
Sustains the pursuer's first plea-in-law to the extent of excluding from
probation the defenders' averments in answer two from the third last line on
page 4 of the closed record (No 13 of process) "The individual defenders
have been given preliminary advice..." to the end of answer two; in answer
three on page 7 of the closed record from the words "He was, in any event,
in material breach of the partnership agreement..." to "...as a result of
the pursuer's fraudulent conduct and the claims arising therefrom." on the
seventh last line on page 7; Repels the defenders' third plea in law; on the
pursuer/appellant's unopposed motion, Certifies the appeal procedure as
suitable for the employment of junior counsel; on joint motion, Reserves
meantime the question of expenses.
NOTE:-
[1] The pursuer is the former partner in a
firm of solicitors in Stranraer. The
defenders are the firm and his former partners.
The case was remitted from Stranraer Sheriff
Court to Glasgow Sheriff
Court in order that the commercial procedures
available in this court could be adopted.
The pursuer admits that he fraudulently dealt with clients' funds and
that he overcharged clients. He
acknowledges that he was in breach of the fiduciary duty he owed to his
partners. Accordingly there was no
dispute that the pursuer was in breach of the partnership agreement. He had little option but to make such
admissions as he was convicted and imprisoned for his activities. Mr Hennessy, solicitor for the defenders,
informed me that following the uncovering of the pursuer's actings, the pursuer
resigned from the partnership, left the firm and made over the whole assets of
the firm to the defenders, the remaining partners. I was informed in the course of the appeal
that the resignation was in writing but the letter was not in process. The pleadings had not been fully developed as
parties had sought a finding on whether the defence of mutuality of contract
was relevant. Since the debate before
the learned sheriff there had been a change in the pursuer's legal
representation with new solicitors and counsel.
The foregoing narrative was accepted to be correct save only for the
concept of the pursuer being said to have "made over the whole assets of
the firm to the defenders". Nothing
turned on this reservation. The pursuer
in this action sues his former partners for payment of a pension. The defenders resisted the action relying on,
inter alia, the principle of
mutuality of contract. The learned
sheriff found for the defenders. The
pursuer appealed.
[2] Clauses 12 and 15 of the partnership agreement
are in the following terms:-
"TWELVE If any Partner shall
(a) become apparently insolvent or enter
into any composition or arrangement with or for the benefit of his creditors
generally;
(b) commit
any act of gross professional misconduct;
(c) do any
act of a serious nature prohibited by Paragraph 11;
(d) grossly
neglect the Partnership business;
(e) fail to account for and pay over or
refund any monies for which he is accountable to the Partnership within seven
days of being requested to do so by any Partner'
(f) act in any respect contrary to the
provision of this Agreement (not being a trivial nature) or to good faith
between the Partners;
then in any of these events, the other Partners may expel
the Partner concerned with effect from such date as they shall specify in a
written notice given by the other partners or such Partners and the partner so
expelled shall be deemed to have retired from the Partnership on such
date. Save that in the event of any matter
alleged under sub paragraph (f) or (g) hereof the other Partners shall first
give the offending Partner notice requiring him to rectify any matter capable
or rectification and/or that any such conduct may lead to notice being given
under this clause and the other Partner shall only be entitled to give such
notice in the event of the offending Partner failing to comply with any such
notice to rectify any matter capable of rectification and/or repeating the
alleged act or other act of a similar nature.
FIFTEEN Each Partner shall (sic):-
(a) The death or retirement of any Partner
shall not necessarily determine the Partnership among the others.
(b) On the death or retirement of any of the
Second, Third or Fourth Partners the First Partner shall have the option to
acquire that deceased or retiring Partner's interest in the Partnership for a
consideration equal to his interest at the date of death or retirement as
determined by the accounts drawn to that date.
The foresaid option shall be exercise by the First Partner within three
months from the date of death or retiral.
(c) On the death or retirement of the First
Partner each of the Second, Third and Fourth Partners shall have the option, to
be exercised in writing within three months from the date of death or
retirement of the First Partner, to acquire his interest in the Partnership in
accordance with a set of accounts to be drawn as at the date of death or
retirement incorporating.
(i) Any heritable property at
the then open market value with vacant possession.
(ii) The goodwill and work in
progress at a combined value which will be a sum equal to one third of the
annual gross fee income of the firm for the three preceding years.
(iii) The whole other assets of the
firm including all furniture, fixtures, equipment, stationery, text books at
their net value on a written down value for tax purposes.
(d) In the event of the option contained
in paragraph 16 c. (sic) hereof not
being exercised as to the entirety of the first partners interest in the
Partnership the Partnership shall be wound up.
In that event the First Partner or his Executors heirs and Assignees
shall have the right to acquire the practice as if the Second, Third and Fourth
Partners had retired and the First Partner had exercised his option to acquire
their share as hereinbefore provided.
(e) On the death or retirement of the First
Partner he or if he shall have died his personal Representative, may elect to
receive in lieu of any sum due to him or his estate in respect of the goodwill
and work in progress of the Partnership a Pension for the period of 10 years,
payable to him or if he had died to his wife or representative equal to one
quarter of the First Partners average income calculated on the previous three
years gross income.
(f) Any valuation for the purposes of this
paragraph shall be agreed between a Valuer appointed by the Partners and in
default of agreement shall be fixed by a
Valuer nominated by the President for the time being from the Law
Society of Scotland. The cost of any
such Valuation shall be an expense of the Partnership."
[3] Mr Bartos, Advocate, for the
pursuer/appellant, submitted that there were four legal propositions which
underpinned the pursuer's position:
1) Retention
of performance of an obligation due under a contract was only available as a
temporary defence in order to compel the performance by the pursuer of an
obligation due but not being performed by the pursuer which is reciprocal to
the one which the defenders are refraining from performing.
2) The
obligations of parties to a contract are presumed to be reciprocal unless
parties show the intention to the contrary in a contract.
3) The
defence of retention is available only if the pursuer is continuing to fail to
perform the reciprocal obligation. It is
not available in order to compel performance of an obligation which has been
breached on a one-off occasion and which breach can no longer be purged.
4) Where
a person is entitled to exercise a defence of retention of performance he loses
that entitlement where he subsequently seeks to rely on the contract.
[4] Support for the first and third
propositions was said to be found in Erskine, Book III, Title iii at
paragraph 86. I was effectively
taken through Lord President Rodger's opinion in Macari v Celtic Football &
Athletic Club 1999 SC 628. Counsel
took what was said at page 640H as support for the proposition that before a
party can withhold performance the breach said to entitle such a withholding of
performance must be capable of being purged.
Lord Caplan's opinion at 650D was used to support the foregoing and to
add a further gloss to the effect that no retention arises in respect of a past
breach of contract. In other words,
since the breach by the pursuer was completed and in the past the defenders
could not withhold performance of their obligation to pay the pension. It was suggested that Lord Marnoch at page
654H had taken a slightly different approach particularly where at 655D he
suggests that the obligation to maintain trust and confidence was so basic and
all pervading that such a breach struck at the very root of the contractual
relationship. All this was said to be
properly explained in the South African case of B K Tooling v Scope Precision Engineering 1979 (1) SA 391(a). I was taken through the report for the
purpose of explaining the derivation of the defence of retention. It was submitted that the passage at 415 to
416 supported the view that retention was a form of quasi security to ensure that the other party carried out the
obligation presently not being carried out.
The passages at pages 417 and 418 were said to support the proposition
that one could plead non-implement by the seller not as a bar to the action but
as a bar to judgement. Continuing in this theme I was referred to ESE Financial Services v Cramer 1973 (2)
SA 808(c). I was briefly referred to Bank of East Asia 1997 SLT 1213 at 1218
and in particular the speech of Lord Jauncey where he said "It
follows that retention may be operated against corresponding obligations
prestable but unfulfilled, but has no relevance to obligations duly
performed."
[5] In support of the second proposition
which I set out earlier I was referred to Lord Rodger at 640G to 641D;
Lord Caplan at 650D and Lord Marnoch at 655C.
It was suggested that Turnbull v McLean (1874) 1R 730 was
"sometimes misunderstood".
[6] For the fourth proposition I was again
referred to Macari and in particular
to Lord President Rodger in Macari
at 641E-H and 642B, Lord Caplan at 650E and Lord Marnoch at 655E. I was also referred to Hoult v Turpie 2004 SLT 308 at 313L. It was submitted that it would be an odd
result if any act contrary to good faith resulting in no loss to the
partnership could result in the partner not being able to obtain either his
share of the capital of the firm or his pension entitlement.
[7] Mr Hennessy for the defenders submitted
that a partnership is a relationship in which
the parties owe fiduciary duties to each other. These duties exist even before the partnership
is commenced, continue during its subsistence and even after its
termination. The pursuer had breached
that duty. It was a material breach
which went to the root of the contract and subsisted throughout the contract. Where a partner is in breach of the contract
in such a manner the remaining partners are entitled to withhold performance of
any terms of the partnership contract.
The principle of mutuality applies in the circumstances of this case to
prevent the pursuer having any claim based upon its terms. The pursuer was engaged in fraudulent activities
throughout the period of the partnership which he concealed from his partners
and others. These were for his own
personal gain. They included conduct
which increased the profits of the firm for his own benefit. The present claim is for payment of a pension
which is based upon these fraudulent profits.
He referred me to Bank of East
Asia, Macari and Hoult v Turpie.
[8] I have come to the view that this appeal
must be allowed. The decisions in Bank of East Asia and Macari are binding upon me. In Bank
of East Asia Lord Jauncey, after carefully reviewing the authorities
stated:-
"My Lords, I do not consider that the authority
wasn't so broad a proposition as that any material breach by one party to a
contract necessarily disentitles him from enforcing any and every obligation
due to the other party. In applying the
general principles enunciated by Lord Justice-Clerk Moncrieff in Turnbull v McLean regard must be had
to the terms of the contract in question."
After
considering the speech of Lord Jauncey, Lord President Rodger in Macari said:-
"This authoritative gloss by Lord Jauncey confirms
that the law does not regard each and every obligation by one party as being
necessarily and invariably the counterpart of every obligation by others. One has to have regard to the
circumstances. Lord Jauncey deduces from
this that a material breach by one party of a particular term of a contract
does not of itself mean that he cannot require the other to perform any of his obligations under his
contract. Rather, the party in breach
cannot insist on the other party performing his obligations in relation to the
part of the contract of which the first party is in breach."
Lord Caplan put
it thus:-
"The retention of performance must be directed at a
failure on the part of the other party to perform a counterpart
obligation. Moreover for retention to be
available there must be a continuing failure to perform the counterpart
obligation. No retention arises in
respect of a past breach of contract by the other party".
I am not
convinced that Lord Marnoch was saying anything different from that said by
Lord President Rodger and Lord Caplan when at page 655 he said that in the
normal situation "all the parties' obligations and counter obligations
are, as it were, exigible contemporaneously...This is, of course, only a
presumption and,...it can be overcome by parties making clear their intention
that certain obligations and counter obligations can be looked at
independently."
In Hoult v Turpie Lord Drummond-Young acknowledges
the principle set out by Lord Jauncey in his speech when he says at paragraph 8
on page 312:-
"The submissions made by counsel on either side
raise an important issue relating to the principle of mutuality of contractual
obligations: the nature and significance
of the requirement that, for the principle to operate, the obligations in
question must be the counterparts of each other. The existence of such a requirement is clear;
indeed, it is inherent in the very notion of mutuality. The dispute between the parties centres
rather on the extent to which the individual obligations on one side of a
contract are to be regarded as the counterparts of the individual obligations
on the other."
In paragraph 9,
Lord Drummond-Young goes on to say:-
"I am of opinion that the principle of mutuality
should not be interpreted in a way that substantially curtails the availability
of the defence of retention. That
applies in particular to the requirement that the obligations should be
counterparts of each other; that requirement should not be used in an
artificial manner which breaks up the essential unity of a contract.
[9] There can now be little doubt that under
Scots law before one party to a contract can withhold performance of an
obligation incumbent upon that party on the grounds that the other party has
failed to perform an obligation incumbent upon it under the contract, the two
obligations must be the counterpart of each other. The question then becomes one of
interpretation of the contract. As Lord
Rodger puts it in Macari at page
640I:-
"Lord Jauncey does not spell out the circumstances
in which one obligation will fall to be regarded as the counterpart of
another. Sometimes of course the express
terms of the contract will regulate the matter. In other cases it depends on the intention of
the parties as gleaned from the terms of the contract."
[10] In a simple case of a property owner
instructing a tradesman to carry out a single piece of work the position is
very clear: until such time as the
tradesman has performed his obligations and completed the work the property
owner is under no obligation to make payment of the contract price agreed to by
the parties for the work to be done. We
are here dealing with a contract of partnership which is more complex. In essence the question to which the parties
wished an answer is:- "Is the
contractual obligation undertaken by the defenders to pay to the pursuer a
pension the counterpart of the obligation of the pursuer not to defraud clients
and not to breach the fiduciary duty owed to his partners?" The contract might be thought to be weighted
in favour of the pursuer. However it is
not for the court to re-write the obligations which the parties respectively
undertook. Clause 15 deals with
retirement. Clause 15(c) provides that
on the pursuer's retirement the remaining partners can opt to acquire the
pursuer's interest in the partnership.
That interest is said to include inter
alia the goodwill and work in progress of the firm. Clause 15(e) gives to the pursuer upon
retirement the right to elect to receive, instead of a lump sum representing
goodwill and work in progress, a pension calculated by reference to a
formula. Clause 12 provides that if
any partner performs a variety of acts, including acting in such a way as to
bring his name or the name of the partnership into disrepute or acting in any
respect contrary to good faith between the partners, then that partner may be
expelled. The clause goes on to say that
"The partner so expelled shall be deemed to have retired from the
partnership on such date." Thus if
a partner brings the firm's name into disrepute and is expelled that is deemed
by the agreement to be the equivalent of a retiral from the firm. As has been seen a retiral entitles the retiring
partner, at his option, to payment of a pension instead of a lump sum
representing goodwill and work in progress.
I accept that in this case the defenders did not expel the pursuer which
they would have been entitled to do. The
pursuer beat them to it and resigned albeit not in accordance with Clause
13. Clause 13 required that the retiring
partner should give not less than six months notice in writing. The pursuer retired with immediate
effect. A consideration of the foregoing
gives an insight into what was in the minds of the parties at the time they
entered into the contract.
Notwithstanding expulsion, perhaps for breaching the duty of good faith
to his partners, a partner was entitled to receive the balance on his capital
account. Conforming to the criteria set
out in Clause 12 was not considered by the signatories to the contract to be a
counterpart of being entitled to payment of one's capital. I agree with Mr Bartos that this is a very
powerful indicator that in relation to this particular contract the actings of
the pursuer, reprehensible though they were, do not entitle the defenders, per se, to withhold payment to the
pursuer of what would otherwise be due to him from his capital account. The parties would appear not to have intended
that acting in good faith was a counterpart obligation to being paid one's
capital upon being expelled from the firm.
In coming to this position I am mindful of the obiter remarks of Lord
Drummond-Young in Hoult, regarding the "essential unity of a contract." There is a limit to how far one can take this
concept and at the same time follow the binding decisions of Bank of East Asia and Macari.
When one is dealing with a contract extending to eight pages, as the
partnership agreement does, it seems to me almost inevitable that some
obligations will not be the counterpart of others. For example Clause 11(j) provides that no
parties may incur any capital expenditure in respect of the partnership in
excess of £1,000. If a partner breached
that clause by incurring capital expenditure in excess of this sum he will be
in breach of the partnership agreement.
I doubt if anybody would seriously suggest that such a breach would
entitle the other partners to withhold payment of that partner's share of the
profits as provided for in Clause 3, should the firm have received value for
the expenditure. If the actings of the
pursuer have not in any way damaged the financial position of the firm there
does not seem any good reason why the remaining partners should receive a
windfall represented by the pursuer's capital.
The fact that the contract
provides that the capital can be received in instalments as a pension is
irrelevant. In the context of a contract
of employment the duty of good faith owed by the employer to the employee has
been said on many occasions to go to the heart of the employer/employee
relationship. In the context of a
partnership agreement I am of the view that a breach by one partner of the
fiduciary duty owed to the other partners also goes to the heart of the
contract. Such a breach might entitle
the other partners to expel the partner in breach. Indeed that is what the partnership agreement
provided in this case. However it does
not follow that the expelled partner is not entitled to receive the balance at
credit of his capital account.
[10] The court is being asked at this stage to
answer a narrow question. It may be that
the pleadings will be developed and that the defenders will plead a case that
the actings of the pursuer did have an adverse financial impact upon the
firm. Should that be the case I did not
understand it to be disputed that the defenders would be entitled to compensate
any financial loss sustained by the firm as a consequence of the pursuer's
actings against any sums due to the pursuer.
I do not consider there to be force in Mr Hennessy's submission
that the pursuer was not entitled to payment of his capital because his capital
account was inflated by virtue of his actings.
By overcharging clients there can be little doubt that the profits of
the firm will have been inflated. That
will probably have fed through to the pursuer's capital account. The defenders, as partners in the firm, will probably
also have benefited from the pursuer's actings even if "salaried partner"
is a means of describing their status. I
can see that there might be some force in this argument if those clients who
had been overcharged now sought repetition of the sums paid in excess of what
they should have been charged. There is
no suggestion that this happened. I do
not think the defenders nor the court, can look behind the figures in the
firm's accounts.
[11] I should record that there was no
submission made that by having "made over" his entitlement to the
assets of the firm to the defenders, the pursuer had donated the sum at credit
of his capital account to the defenders.
In any event I could not have dealt with such a discussion as Mr Bartos
reserved his position on whether the pursuer had "made over" his
entitlement to the assets of the firm to the defenders.
[12] I had the benefit of being very well
addressed by the representatives of both parties. In that respect I had a considerable
advantage over the position in which the learned sheriff found himself.