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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Maillie v Swanney & Ors [2000] ScotCS 29 (1 February 2000) URL: http://www.bailii.org/scot/cases/ScotCS/2000/29.html Cite as: [2000] ScotCS 29

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The parties are solicitors. The first, second and third named defenders, along with two others, entered into a contract of partnership on 20 September 1993 to carry on business under the firm name of "Digby Brown & Co.". By deed of assumption dated 9 May 1994, the original five members of the firm assumed the pursuer as a partner. By deed of assumption dated 17 July, 1997, the six partners assumed the fourth, fifth and sixth defenders as partners of the firm. At the date of the commencement of this action two of the original partners had ceased to be members of the firm, and the seventh to tenth-named partners had been assumed. Neither the pursuer nor the defenders relied on the terms on which former partners left the firm nor on the terms on which the seventh to tenth-named partners joined the firm at the present stage in this dispute.

On 18 November 1998 the pursuer gave written notice that he intended to dissolve the partnership with effect from close of business on 30 April 1999. Other documents were served but they are not relevant for present purposes. There is a dispute between the parties whether the pursuer had already resigned from the firm prior to service of the notices. Whatever the outcome of that dispute, the defenders contend that the pursuer was not in any event entitled to dissolve the partnership by notice. The quantification of the pursuer's interest in the assets of the partnership depends upon the effectiveness of his notice of dissolution. Debate was ordered on that matter as a preliminary issue accordingly.

Clause 1 of the contract of partnership of September 1993 was in these terms:

Clause 10 of the contract provided for the consequences of insolvency and certain related events. The insolvent partner was to cease, ipso facto, to be a partner and to be excluded from the business. The assets of the firm were to be held for the other partners to the exclusion of the excluded party. By clause 10 (c) it was provided:

Clause 11 provided for expulsion for fundamental breach of contract, inter alia. Provision was made for payment of the expelledat partner's share on a conventional accounting basis. Clause 11 (d) was for all practical purposes in the same terms as clause 10 (c), and provided that expulsion would not terminate the partnership.

Clause 12 provided for retirement. Any partner was to be entitled to retire on giving at least six months' notice to that effect. Every partner was obliged to retire at 30th April following his or her sixtieth birthday. Clause 12 (b) provided for the valuation and payment of the retiring partner's share. It was again provided that retirement would not terminate the partnership, except where a sole practitioner remained.

Clause 13 provided for death or incapacity to be dealt with as retirement, and clause 12 (b) was applied.

Clause 14 provided that:

Clause 15 (b) made provision for two different situations. Where any of clauses 11, 12 and 13 applied, the remaining partners were to have an option to discontinue the business. In that event, or where there was a mutually agreed termination in terms of clause 14, the whole assets of the partnership were to be sold and the net proceeds of sale were to be substituted for the values which would otherwise have been used in ascertaining the amounts of partners' interests.

The 1994 deed of assumption of the pursuer, referring to the original members of the firm as the "Continuing Partners", provided:

Clause Four provided for parties' interests in revenue and capital profits and for contributions to capital.

The 1997 deed of assumption had a similar structure. It provided that the partnership should subsist until 30 April 1998 and from year to year thereafter in terms of clause 1 of the original contract. The application of the profit sharing provisions was altered in the case of the sixth-named defender.

For the defenders, Mr Currie argued that the action should be dismissed. Having regard to the terms of the contract, neither section 26 nor section 32 of the Partnership Act applied in the circumstances. The pursuer was not entitled to dissolve the firm by notice. Even if the statutory provisions did come into play, the pursuer's case had no legal foundation. The partnership was not one in respect of which there was no fixed term, in terms of section 26, nor was it a partnership entered into for an undefined term, in terms of section 32 (c). No single partner had a right to dissolve the partnership. The inter-relationship of sections 26 and 32 (c) was explored in Moss v Elphick [1910] 1 KB 846. Section 26 applied where there was no agreement at all relative to termination. In such a situation, section 26 made provision for a partner to terminate his own involvement in the partnership. It did not affect the other partners. But it was unnecessary to decide on its scope in this case. The pursuer's case depended fundamentally on the application of section 32 (c). On a proper construction of the partnership agreement section 32 was excluded. The pursuer's action was irrelevant unless he had given a valid notice of dissolution. The contract provided that the partnership should continue unless terminated in one or other of the two ways specified in clause 1. Those were mutual agreement and exercise of the continuing partners' option under clause 15. Clauses 10 to 13 otherwise made it clear that the firm was to continue notwithstanding changes. Partners might leave, in terms of clause 12, and other situations were covered. It was incorrect to contend as the pursuer's note of argument suggested that clause 14 was permissive and did not exclude other possibilities. If it were permissive it would be redundant. It was the measure of one of the two circumstances in which dissolution was envisaged. Neither in its original form, nor as amended by the deeds of assumption was this a partnership under an agreement which provided for a fixed initial term but madeand no provision for continuation. The pursuers appeared to rely on the deeds of assumption as if they resolved an ambiguity in the contract of partnership. There was no ambiguity. In any event the expression "from year to year" was not apt to convert a partnership intended to continue until terminated by mutual agreement into one which continued only from year to year. The expression did not undermine the operation of clause 1. In particular the specific reference to clause 1 would have been inappropriate if the intention had been to alter the basic agreement. Clause 1 was intended to continue to apply, but from a different specified date. The whole provisions applied to incoming partners. It would not have made commercial sense for partners who were members of a firm of a continuing nature, which was intended to endure until dissolved by agreement, to change the constitution of the firm into one which any partner could dissolve. One would require very clear language to achieve that. The one thing a firm of solicitors did not need was the disruption implicit in such a scheme. A new partner would be a Trojan horse, capable of bringing down the whole edifice whatever the interests of the majority. Mr Currie advanced an alternative submission. If dissolution by notice were not excluded on a proper construction of the deeds, the agreement was not in any event for an undefined term. Properly construed the agreement was to subsist for the joint lives of the partners for the time being. That was implicit in the terms of clauses 10 and 11. These provisions made it clear that the partners were anxious to ensure that so long as there were two partners at least the firm continued. To place so much emphasis on the language of the deeds of assumption sat uncomfortably with the subsisting comprehensive code found in the contract. No

For the pursuer, Mr McNeill argued that Moss v Elphick did not provide a comprehensive analysis of sections 26 and 32. The three judges gave different reasons for their conclusion, and many obvious points were not discussed. Section 26, at least, allowed a partner to leave the firm and to avoid remaining indefinitely in partnership with another person or persons whatever had become of their relationship, and whatever the obligations which were accruing. Any partner could leave, unless there was a fixed term which was still current. The legal result, and the characterisation of that result, were less than clear. There had been much academic discussion. But on the terms of section 26 alone, the provision allowed one to get out of the firm without determining the consequences. The pre-existing law suggested that such an act did not dissolve the firm. Accordingly, for present purposes, the pursuer's argument was based on section 32. Section 32 (a) was the counterpart of section 26. It applied where there was a fixed term with a definite expiry date. When that arrived, the partnership was dissolved. Section 32 (c) had to deal with a different situation. In this case, the contract envisaged from the outset that there might be additional partners. Provision was made for variation of profit shares should that occur. Clause 1 was curiously worded in the circumstances. If the intention had been that clause 14 governed the duration of the partnership there was no need for an initial date to be mentioned at all. Further there were many situations in which the partnership might be terminated without reference to clauses 14 and 15. This was not on any view a case in which the partnership could only be terminated by mutual agreement. Moss v Elphick was readily distinguished. And, critically different from the circumstances in that case, there were more than two partners at all times. In Moss v Elphick, oOne partner had made a substantial financial contribution; the other ran the business for a fixed sum of drawings. The opinions were heavily influenced by the facts. The risk of disruption relied on related to the firm. The inference that there could be dissolution on death of the first to die depended on the provision that only by mutual agreement could the firm be dissolved. Here clause 14 was not exclusive. If it were the case that the other provisions truly and properly exhausted the possibilities, one might dispense with the expression "only". But here there were other provisions which could bring about a termination. In context clause 14 was merely permissive. One could retire on notice if one considered it appropriate: clause 12. That was a sensible provision. But dissolution by notice was not precluded. That suited or might suit the requirements of all parties, a majority as well as a disaffected individual. Reading clauses 1 and 14 together, clause 14 could not be read as operating only after the expiry of the first year. OIn its terms it was operable at any time. The provisions together were ambiguous. When one had regard to the deeds of assumption, either they fell to be read as addressing and resolving the ambiguity, or they had to be read as prescribing new provisions for duration. Only clause 1 was modified. If the defenders were correct in their approach there would have been no need to amend clause 1 at all. There were two significant changes: the introduction of a new reference date, and the introduction of the expression "from year to year". The first change gave emphasis to date: it showed that this was not simply an accounting reference date but was a date of significance. One could not ignore it. The continuation of the partnership from year to year similarly had significance. The amended provisionsy specified what was to happen in the new partnership. The formulation was anticipated in Bennett Miller page

In reply, Mr Currie argued that the major issue was whether it was plausible, when one found all of the machinery contained in this contract dealing with outgoing partners, it was plausible that overlying all, on a sound construction of the documents, was an unqualified right in each and every partner to dissolve by notice at the annual reference date. It was not plausible. The submission was incompatible with the structure and terms of the provisions themselves. While it was necessary to give meaning to expressions such as "from year to year", it was important to avoid treating them as words which had specific legal meanings, such as they had in the context of leases. They did not carry the connotation of tacit relocation in a partnership context. They were not a term of art. The expression in the present deeds simply pointed to a tract of future years ending when clause 14 or clause 15 came into operation. The possible long duration of the partnership was not a problem. It was important to emphasis the words "thereafter" in this case. Termination was envisaged only after the initial period or periods from time to time specified. The position for which the pursuer contended did not benefit a majority. But, in any event, where parties have elected not to make provision for a majority to take action to remove an unsatisfactory partner except in very special circumstances, it would be odd if they had in contemplation the much more radical right of an individual partner, without reason, simply to dissolve the firm on notice. Partnership was a contract involving fidelity. The interests of the partnership as a whole had to be in contemplation.

The primary remedy which the pursuer seeks is decree of declarator that Digby Brown & Co was dissolved in terms of the notices which he served. The Partnership Act, 1890 recognises throughout the scope for parties to regulate their relationships and interests by agreement. Business activities and the approaches individuals adopt to the conduct of business are almost infinitely variable and the nineteenth century Parliament, with commendable restraint, avoided prescription in many situations where there might have been a temptation to impose restrictive or regulatory solutions. In such a context there is a risk of error if one attempts to develop an over-rationalised analysis of the provisions of the Act. In my view, however, it is clear that termination of a partnership as it had existed immediately prior to that event and dissolution of the partnership are not analogues. There may be a sense in which a partnership is terminated as among its partners and superseded by a "new" partnership constituted among the same individuals, or some of them and others, whenever there is a change of constitution or composition. In most cases such changes occur without any question of dissolution arising. Dissolution of partnership, and the consequences of dissolution, are provided for in sections 32 to 44 of the Act.Partnership Act, 1890. It is unnecessary for present purposes to discuss these provisions at length. But some of them These provisions are important in characterising dissolution as envisaged in the Act. It is unnecessary for present purposes to discuss them at lengtht. Some examples suffice. On dissolution the individual partner's' authority to bind the firm changes. It subsists thereafter "so far as necessary to wind up the affairs of the partnership" and to complete unfinished business, but not otherwise: section 38. Subject to that limited exception, the mutual agency of the partners defined in section 5 is at an end. Apart from contrary provision in the partnership agreement, there are prescribed rules for the application of partnership property and the distribution of surpluses and incidence of deficiencies. But the almost infinite flexibility of partnership is also reflected. In sections 42 and 43, for example, it is clearly envisaged that, despite dissolution, the business may continue, and that there may be a relationship among some former partners that makes it sensible to provide that the sum brought out on an accounting with an outgoing partner or that person's representatives is a debt. The creditor is identified, but the debtors can only be those who have in some way which is not defined continued to have possession of the former firm's assets. It would be unwise to generalise too far, but oOne can say that dissolution refers to an event on which the relationship of partnership ceases as among the partners of the dissolved firm. That firm terminates as part of the dissolution. . There are some practical consequences of dissolution which are prescribed in the absence of agreement. TheseBut these are relatively limited in scope. The Act does not in general prescribe for the wider consequences of dissolution in an unqualified way. But it is clear that dissolution involves procedures beyond termination which will result in crystalisationcrystallisation of the interests of the partners both inter se and in questions with third parties. The conduct of the business as it was is materially affected. Sections 26 and 27 of the Act recognise other aspects of the flexibility of partnership. In my opinion, tThey do not deal with dissolution or its consequences, however. Section 27 applies where there has been an event which, in terms of section 32 (a), would have dissolved the firm, but the partners continue in business. The partnership continues, and the rights and duties of the partners remain as they were "so far as is consistent with the incidents of a partnership at

In my view, it is consistent with the notion that dissolution is a more comprehensive change in the relationship that the circumstances in which dissolution occurs are more narrowly prescribed that those regulating termination of the firm. Section 34 is absolute. Illegality dissolves the firm, but supervening illegality is a relatively rare occurrence. Section 33 applies on death or bankruptcy. It is frequently avoided by agreement. Section 35 provides for dissolution by the court on a discretionary basis where a ground of dissolution is made out. There is no common characteristic among the prescribed grounds other than that they are examples of relatively extreme situations in which it may be appropriate for the court to intervene in business affairs and order dissolution. But together they are incompatible with any notion that an individual partner has a general right of some kind to bring about dissolution at his own hand. Section 32 has to be construed in that context.

It is not necessary for present purposes to reach a concluded view on the scope and application of section 26. On one view, it may reflect a deliberate departure from a much older common law principle discussed by Bell at ii 521 and reflected in the opinion of the Master of the Rolls in Fetherstonhaugh v Fenwick 17 Ves. jun 298 at page 119 that after the expiry of a fixed term any partner might dissolved a partnership at will, following the expiry of a fixed term, subject to notice. On the other hand, Section 26 may deal with the alternative view of the common law that any partner may fairly, and at a period not prejudicial to the others, terminate his own concern in the partnership: Bell ibid. Whatever the correct view of section 26, section 32 (c) cannot, in my opinion, be construed as relating to a partnership at will arising after the expiry of a fixed term. In the first place, it applies by reference to the terms on which the partnership was "entered into". Since modification of partnership contracts during the subsistence of the partnership must have been envisaged, that expression must have its focus in the agreement under which the partnership is operated at the material time. Subject to that the provision is concerned with the constitution of the firm at a point in time as ascertained from the terms of the partnership contract. Secondly, it focuses on the provisions the partners have or have not made for the duration of the partnership by definition in the contract. One is directed to the contract to ascertain whether the partnership was entered into "for an undefined time". That is, in my view, a situation in which the partnership was entered into without the partners making provision, expressly or by implication, for the duration of the firm in the circumstances which have come about.

In the present case it is necessary to read the contract of partnership and the deeds of assumption together to ascertain the terms binding the parties at the material time. In my opinion, and despite the inelegance of the result, clause 1 of the contract of partnership, as modified by the 1997 deed of assumption, has to be read as follows:

The modifications introduced by the deeds of assumption did not, in my opinion, alter the relationship between the initial period or periods and the provisions of clauses 14 and 15. But the effect may have become different after the modifications made by the deeds of assumption. It is appropriate to consider the issue firstly as a matter of language. In the original contract, there was an initial fixed period of a year after the expiry of which the partnership might be terminated in one or other of the specified ways. Clause 14 used the expression "at any time". But that could have been read consistently with clause 1 by reading it as applying to any time after the expiry of the initial year. In my view there would have been no difficulty in construing the provision in those terms. On that approach, cClause 14 would not havedid not come into play at all, in terms of clause 1, until after the initial year. The words "at any time" would not have applied to a period before the clause became operative. The effect of the modification introduced by the deeds of assumption was to extend the initial period progressively, year by year. On the face of it, as Mr McNeill contended, once a new year had begun it had to run to its conclusion. There would never be a time when the operation of clause 14 was not excluded by the chronology if one construed it as applying only after the termination of the rolling initial period. Even as a matter of language, that does not necessarily follow, in my view. There would be nothing to prevent partners from agreeing in the course of one year to terminate the partnership at some point during the following year. If that were done the agreement would prevent the following year opening as one within the extended initial period. The same result could have been achieved under the original contract. Clauses 14 and 15 could remain the exhaustive measure of the parties' rights to bring about a dissolution by voluntary act.

However, in my opinion, the approach adopted by the pursuer to construction is wrong in a more fundamental sense. It involves placing emphasis on clause 14, read in isolation, as a positive statement of the power of the partners to dissolve the firm. Partnership is an ordinary consensual contract. All of the partners acting together can alter or amend its terms or terminate their relationship by common consent at any time. Clause 14 did not confer a power which was dependent on its specification in the document. Read in isolation, and as a matter of contract, it achieved no positive result. It expressed a truism of partnership law. Its only conceivable function, along with clause 15, was to exclude other means of terminating the contract. In that respect the provisions together played the same part in defining parties' relationships as the clause in Moss v Elphick. The word "only" does not appear in clause 14. But given the provisions of clause 15 it could not have appeared consistently with the scheme of the contract. It is the terms of clause 1 which that provide that clauses 14 and 15 define the means of termination in this case. That applied during the initial period of one year in the contract as during the extended periods since.

In my opinion, the scheme of this contract was clearly drawn (a) to define the duration of the partnership as that period during which two or more individuals, whether members of the original firm or individuals assumed into the partnership as envisaged in the contract, carried on the business without exercise of the powers referred to in clauses 14 and 15, and (b) to prevent any individual partner from bringing about the termination of the firm without the agreement of the others. The death of the penultimate partner for the time being operated as a "long stop" in respect that on that event there ceased to be a business unit within the definition of partnership in section 1 of the Act. Clause 10 (c) achieved the parties' objectiveat in the case of insolvency. Clause 11 (d) achieved the desiredat result on expulsion. Retirement, death and incapacity were covered by the terms of clause 12 (b). Clause 15 (b) is important in this context. The continuation provisions bound the un-affected partners. So, in the case of voluntary retirement, any partner could retire at any time and attract the benefits provided in clause 12 (b). Conceivably, more than one partner might retire at the same time and then each would be entitled to those benefits. Clause 15 (b) allowed the remaining partners the option to avoid the operation of clause 12 (b). But they could achieve that only by terminating the partnership and proceeding to realise and distribute the whole assets of the partnership. There was no provision for a majority to bring about that result. Only the whole continuing partners could give notice to the person or persons seeking retirement that the firm was to be terminated instead. The provision again, therefore, put a substantial obstacle in the way of individuals bringing about the termination of the partnership, whether or not they represented a majority of those affected by the provision. Of course it follows that there might be many situations in which these provisions failed to provide a majority with the means of achieving a result which the majority thought right. Mr McNeill identified the removal of an unsatisfactory partner as an example. If an unsatisfactory partner refused to retire he or she could become a serious embarrassment to the majority provided that the person avoided the grounds for expulsion in clause 11. Not only did cClause 11 makde express provision for expulsion on limited, specified grounds, however. The power of expulsion was capable of exercise only by the whole innocentwhole other partners, and not by a majority. The parties must be taken to have considered it right to restrict the powers of the whole other partners to the specified grounds. It would be wholly consistent with that view that the partners should have accepted that a majority should not be empowered to remove a person who had merely become unacceptable or unsatisfactory. In a practical sense one might ask, with Mr McNeill, whether the whole implications of the scheme of the agreement had been in contemplation at the time it was entered into and amended. But that would not be a profitable approach to construction of what is found in the terms of the documents. Clause 14 is consistent in its structure with these other provisions in requiring unanimity of purpose among those empowered to act in the circumstances to terminate the partnership.

It is a consequence of this approach that the partnership in this case might endure for a very long time. In Moss v Elphick the court appeared to have been influenced by the view that the partnership had to come to an end on the death of the first to die of the partners. In the circumstances of that case it may have been appropriate to ignore the possibility of assumption of additional partners. But in the present there has already been considerable growth and the possibility exists that generations of new partners will succeed in time so that the firm never ceases to exist by the mechanism of the death of the penultimate partner for the time being. I do not think thisat is material. The death of the penultimate partner may be postponed for many generations. It would still be a defined termination of the partnership. It is not uncommon for professional firms to have an interest in perpetuating the firm name long after the lives of the current partners.

To return to the terms of section 32 (c), and its application in this case, the contract as modified, in my opinion, contained an intelligible framework of provisions defining the duration of the partnership in the events which have happened to date. If the pursuer had retired as the defenders contend, it would have been too late for him to have served notice of dissolution if otherwise competent. Assuming that he had not retired, in my opinion, s. Section 32 (c) did not apply. The notice given by the pursuer was not a notice to which the section applied. It did not dissolve the partnership. The notice was one which the pursuer was not entitled to serve, having regard to the positive provisions of the agreement. It is unnecessary to express a view whether Moss v Elphick is good law in Scotland. One would incline to the view that the decision should be followed in an appropriate case. . It has stood the test of time in England, and has been applied there. In my view the result I have arrived at in this case is consistent with that decision and those that have followed it. But apart from providing material for comparison it is unnecessary to rely on the decision in resolvinghas no bearing on the questions which have to be answered in this case on the language of the deeds executed by the parties.

In the circumstances I shall sustain the first plea in law for the defenders and dismiss the action.