Scottish Court of Session Decisions

 

OUTER HOUSE, COURT OF SESSION   [2006] CSOH 182
CA37/05	OPINION OF LORD DRUMMOND YOUNG   in the cause   (FIRST) HARDEV SINGH PUREWALL; (SECOND) KIRPAL KAUR PUREWALL; (THIRD) BELHAR SINGH SANGHERA and (FOURTH) SURINDER KAUR SANGHERA   Pursuers;   against   GURBAX KAUR PUREWALL   Defender:     ­­­­­­­­­­­­­­­­­________________

 

 

Pursuer: MacNeill; Archibald Campbell & Harley WS

Defenders: MacColl; Lindsays WS

 

5 December 2006

 

 

[1] From 1 December 1990 onwards the pursuers, the defender and the defender's late husband, Jaipal Purewall, carried on business in partnership as restaurateurs and commercial property owners under the firm name of Himalaya Tandoori. The partners entered into a contract of partnership dated 4 January 1991 and registered in the Books of Council and Session on 14 January 1991. Jaipal Purewall died on 11 March 2002. The surviving partners continued in partnership thereafter; that was permitted by Clause Eighth of the contract of partnership. On 22 April 2003 the pursuers served upon the defender a notice of dissolution of the partnership in terms of Clause First of the contract of partnership. It is agreed that the effect of that notice was to dissolve the partnership with effect from 30 November 2003. On about 30 November 2003 the defender intimated to the pursuers by letter that she intended to carry on the business of the partnership on her own account.

[2] The result of the foregoing events was to bring certain provisions of the contract of partnership into operation. These included clause Ninth, which provided as follows:

"In the event of the... dissolution of the partnership...

(a) the whole assets... of the partnership shall become the property of the surviving or continuing Partners who shall settle the whole debts and obligations of the partnership (including any sum due to the outgoing Partners in terms of sub-clause (b) hereof) as at that date...

(b) a Balance Sheet shall be made up in terms of Clause Fifth hereof (and in which no value shall be placed on the goodwill of the business) as at the date of dissolution.... The sum at credit of the outgoing Partner shall be ascertained from such Balance Sheet and paid by the surviving or continuing Partners to the outgoing Partner or his or her trustee by six equal half yearly instalments...".

Clause Fifth (a) provided that a balance sheet should be made up as at 31 May in each year by a nominated firm of accountants, together with a profit and loss account for the year to that date. The balance sheet and profit and loss account were to be submitted to the partners, and were to be signed and docquetted by them within three months after completion of the balance. It is further provided that, when signed and docquetted, the balance sheet would conclusively fix the sum at credit or debit of each partner. Clause Fifth(b) provided as follows:

"Should said Balance Sheet and Account remain unsigned one month after they have been submitted to any Party they shall be held as approved by him or her and shall be effectual as if duly signed as aforesaid unless written objections to the same shall have been stated by the Party within said period of one month. Failing agreement among the parties such objections shall be disposed of by the Arbiter after mentioned, who shall have power... to sign the Balance Sheet as it originally stood or with such alteration as he or she may think proper. Such Balance Sheet may, within one year of its date, be challenged by any Party on the grounds of any palpable error or omission but such challenge shall not confer upon any Party the right to open up the balance, but only to have such error or omission rectified...."

The foregoing provisions of clause Fifth applied to the dissolution balance sheet prepared in terms of clause Ninth(b).

[3] Certain further facts are agreed by the parties. It is agreed that on or about 8 March 2005 the partnership accountant, Mr Richard G. Beattie of Richard G. Beattie & Co, issued to the defender an amended draft set of accounts as at the date of dissolution of the partnership, 30 November 2003, for the finalization of the dissolution. I do not understand it be disputed that the same set of accounts was sent to the pursuers. Those accounts included draft trading and profit and loss accounts and a balance sheet; the balance sheet incorporated the capital accounts of the partners as at the date of dissolution. It is further agreed that, following receipt of the draft accounts, the defender sent a letter dated 4 April 2005 to Mr Russell, a partner of Richard G. Beattie & Co. So far as material, that letter was in the following terms:

"I am writing to you regarding the amended partnership accounts to voice my objection to these accounts, esp since my solicitor has not been contracted by yourselves or Messrs Archibald Campbell & Harley W.S. who act for Mr & Mrs H. Purewall and Mr & Mrs B. Sanghera. Please can you forward copies of what you sent me on 12^th March 2005 (Saturday) to my solicitors so he can advise us accordingly. Could you also sent him a copy of all correspondence to date since my husband took ill in Nov 2002, to do with the business of Himalaya Tandoori, enclosing a letter stating that it's a complete record of all letters received in that period and forward any future correspondence to my solicitor as it arrives".

[4] Against the foregoing background, the pursuers have raised an action against the defender in which they seek payment of sums that amount in total to £886,143.26. The sums sued for are the amounts shown as standing at the pursuers' capital accounts in the balance sheet as at 30 November 2003. The pursuers contend that the letter of 4 April 2005 letter does not state "objections" to the accounts issued on 8 March 2003 for the purposes of clause Fifth(b). In terms of the latter clause, therefore, the pursuers contend that those accounts must be taken to be approved by the defender; that includes the amounts shown as standing at the partners' capital accounts in the balance sheet. The defender, by contrast, contends that through the letter of 4 April 2005 she made a timeous objection to those accounts within the one-month period prescribed by clause Fifth(b). She further contends that the letter of objection was, on its terms, sufficient to comply with the requirements of that clause. Consequently arbitration should take place on the accounts, and the amounts shown in those accounts are not conclusive.

[5] The defender makes certain further averments in relation to the letter of 4 April 2005. She avers that the original partners in the firm of Himalaya Tandoori were three married couples, the first and second pursuers, the third and fourth pursuers, and the defender and her late husband. The management of the partnership's affairs was initially left largely in the hands of the three husbands. In about November 2001 the defender's husband fell seriously ill with a brain tumour. Consequently the defender attempted to become more involved with the business of the partnership. From this time, however, the defender avers that the pursuers, and in particular the first and third pursuers, sought to exclude her and her husband from involvement in the business of the partnership. She avers that during this period cash was removed from the partnership's premises without being accounted for; and that attempts by the defender and her family to gain access to information regarding the business were frustrated by the pursuers. The defender's husband died on 11 March 2002. The defender avers that relations between her and the pursuers deteriorated thereafter; the pursuers continued to exclude the defender from involvement with the partnership and refused to provide information regarding its business; and they made use of partnership assets without accounting for them. Accounts for the partnership were prepared for the period to the date of death of the defender's husband (11 March 2002), and the periods to 31 July 2002 and 31 July 2003. It is averred that those accounts were all objected to by the defender on the grounds that she was excluded from having the information necessary to confirm that the accounts were accurate and that the accounts did contain certain items that the defender knew were inaccurate. Those accounting disputes had not been resolved by 8 March 2005 when the draft accounts to 30 November 2003 were produced. Accordingly, it is averred, the issues of objection that had been raised in relation to the previous accounts continued to affect the draft accounts to 30 November 2003. The points of objection taken to the earlier accounts are then summarized.

[6] The pursuers have tabled a plea to the relevancy of the defender's averments, and seek decree de plano in terms of the conclusions of the summons. The action was appointed to a debate on the relevant plea in law for the pursuers. At the debate counsel for the pursuers submitted that the letter of 4 April 2005 was according to its terms insufficient to comply with the requirements of clause Five(b). The wording of that clause should be given its ordinary meaning. In particular, the expression "written objections to the same", that is to say, the balance sheet and accounts, meant that there should be specific articulated objections to particular entries in the accounts. A generalized objection of the sort found in the letter of 4 April 2005 was not sufficient. Had the intention of the parties been otherwise, another formula would have been more appropriate. For example, that clause might have used the expressions "unless a party states in writing that he objects to the accounts" or "unless a party states in writing that he does not approve of the accounts". In addition, clause Fifth (b) used the wording "unless written objections... shall have been stated". The word "stated" emphasized the need for a document that contained clear and specific objections. Moreover, the use of the word "objections", in the plural, indicated that specific objections should be listed.

[7] Counsel for the pursuers further submitted that, when clause Fifth(a) and (b) was considered as a whole, it was clear that the intention of the parties was to provide a mechanism for the approval of accounts which would avoid unnecessary delays. That was the explanation for the time limit of one month in clause Fifth(b). Moreover, if a proper objection were received, the accounts had to be considered by an arbiter. In terms of clause Thirteenth the arbiter was, in cases of disagreement, to be appointed by the President of the Law Society; consequently it was likely that the arbiter would be a lawyer. The arbiter was, however, given a power to remit "the question in dispute" to an accountant. That power was significant, and if it were to be exercised it was important that the question in dispute should be properly formulated and articulated. Moreover, the object of clause Fifth could be seen as reaching a state of finality within a reasonable time. Proper specification was required if that end were to be achieved. In the present case, the defender's letter of 5 April 2005 did not contain any specific objections. That was so despite, I was informed, numerous requests to her to articulate specific objections. Specific objections had only been made in the form of adjustments to the defences on 29 December 2005. If clause Fifth did not require properly articulated objections to be stated within the period of one month, it was not clear when proper objections, sufficient to go to arbitration, fell to be stated. Consequently, on its proper construction, clause Fifth required that the written objections must raise a question or questions on the accounts that were capable of being disposed of by the arbiter, if necessary through a remit to an accountant. It was submitted that an analogy could be drawn with judicial accounts, and in this connection counsel referred to two cases, Urquhart v Ayrshire and Arran Health Board, 2000 SLT 89, and Gupta v Ross, 2005 SLT 548, where inspecific objections had been held invalid under the relevant Rule of Court.

[8] The defender's secondary position was that, in the circumstances averred by her in relation to earlier sets of accounts, the objections taken to those accounts should be treated as applying to the dissolution accounts. In relation to that argument, counsel for the pursuers submitted that the meaning of clause Fifth was that, when accounts were produced, if a partner did not intend to agree those accounts, he or she must make specific written objections to those particular accounts. Objections to other sets of accounts were not valid for this purpose. That line of defence was accordingly irrelevant. Finally, counsel for the pursuers submitted that, even if the letter of 5 April 2005 had included the various specific complaints about the dissolution accounts that were made in the defences, they would still not have been "objections" within the meaning of clause Fifth. That clause envisaged a statement of objections that were capable of being determined by the arbiter. The allegations made in the defences, however, were allegations of breach of the partnership agreement or impropriety on the part of other partners; they were not specific objections to items in the accounts.

[9] Counsel for the defender submitted that, on a proper construction of clause Fifth (b), the letter of 5 April 2005 complied with the requirements of the clause, with the result that the beginning provision in the clause did not apply. Consequently the present action should be sisted for arbitration. Counsel presented an alternative argument: if the court were unable to reach that conclusion on the wording of the clause, a proof before answer should be allowed on the construction of the defender's letter, in order that it might be construed against the factual background of the relations between the parties and the previous sets of accounts, to which objection had been taken.

[10] In relation to the letter of 5 April 2005, counsel submitted that it was a clear statement that objection was taken to the dissolution accounts, and an expression of concern that there had been no contact with the defender's professional advisers. The partnership agreement did not impose any express or implied requirements as to the level of detail or specification that was to be provided when objections were raised to accounts. Consequently a plain statement of an "objection", so described, was sufficient. The pursuer's construction was in error; in effect, it required a person making an objection to accounts to do so in a document that was effectively a reference to arbitration. That was not necessary, however. The arbitration provisions of the contract, which were in a very standard form, provided a perfectly effective mechanism for the presentation of a party's case to an arbiter; the letter of objection did not require to be a formal submission to the arbiter.

[11] The defender's alternative case was based on the construction of the letter against the surrounding factual circumstances. In the present case, there had been unresolved disputes among the parties regarding three previous sets of accounts. It was accepted that valid objections had been made to those accounts, and the letter of 5 April 2005 should be construed as continuing the prior objections. Counsel further pointed out the entries in one set of accounts carried through to the accounts for the following period, with the result that objections would commonly be carried forward.

[12] In my opinion the letter of 5 April 2005 amounts to an objection to the dissolution accounts for the purposes of clause Five(b). In construing provisions in a contract of partnership, it is I think important to bear in mind that individual partners will commonly not take legal advice before taking steps to exercise rights and powers that they may have under the contract. Consequently I consider that the court should be slow to construe provisions in a contract of partnership in a manner that is unduly legalistic, or that requires, in effect, the preparation of a formal legal document before a right or power can be exercised. That is particularly important where the contract confers a power on a partner and then provides that, if the power is not exercised, certain consequences will be held to be conclusively settled; in such a case the drastic consequences of a failure to exercise the power suggest that a liberal approach should be taken in determining what amounts to an exercise of the power.

[13] The present is such a case. Clause Five(a) provides that a balance sheet and accounts prepared by the partnership accountants will, when signed and docquetted, conclusively fix the sum at credit or debit of each partner. Clause 5(b) provides that, if the balance sheet and accounts remained unsigned one month after they have been submitted to any partner, they shall be held as approved and treated as if signed unless written objections have been stated within that period of one month. Thus failure to lodge a timeous notice of objection has the consequence that the balance sheet and accounts will conclusively and irrevocably fix the sums at credit or debit of the partners' capital accounts. It follows in my opinion that the provision in clause 5(b) regarding written objections should not be strictly construed. In particular, I am of opinion that it should not be construed as requiring anything akin to a submission to arbitration. Instead, it is sufficient that a partner should serve a written notice that indicates with reasonable clarity that the partner objects to the balance sheet and accounts that have been produced by the firm's accountants. Once that is done, the details of the objection can be stated in the reference to arbitration that is contemplated by the second sentence of clause 5(b).

[14] I reach this conclusion for the following reasons. First, the general policy considerations discussed in paragraph [12] appear relevant. Secondly, the partnership agreement contains arbitration provisions of a relatively standard nature. These are found in clause Thirteenth, which provides that any dispute, difference or question among the partners arising out of inter alia the partnership accounts or the dissolution or winding up of the partnership is to be referred to an arbiter; such arbiter is to be chosen by agreement or, failing agreement, by the President of the Law Society; any decree arbitral is to be final and binding and no appeal is competent under section 3 of the Administration of Justice (Scotland) Act 1972. In a typical arbitration in Scotland, once the arbiter has been selected, it is normal for the parties to prepare a reference to the arbiter, either jointly or separately. Thereafter the parties can put forward their respective contentions in whatever manner the arbiter deems appropriate; in arbitrations under partnership contracts, especially those relating to accounting questions, a very informal procedure may be desirable. Thus the appropriate time for the parties to put forward their detailed contentions is not at the stage of stating an objection to the accounts but at a later stage, when a reference is made to the arbiter on the specific questions that are in dispute among the parties. Thirdly, it is in my opinion material that the time limit in clause Fifth(b), one month, is relatively short; it does not seem appropriate that a partner should be required to develop a detailed submission to arbitration in such a limited period.

[15] Fourthly, when an objection is taken to accounts, the problem will frequently be one of lack of information rather than an objection to a specific entry. That might arise if a partner is effectively excluded from the management of the partnership, or from access to its books of account. In that situation it may be difficult to formulate an objection with the sort of precision that the submissions for the pursuers appeared to demand. Thus, if a partner does not have access to the books, he will probably not be in a position to challenge specific entries; nevertheless, the fact that he is denied access to the books is clearly a significant ground of complaint, and he must in due course be provided with the necessary financial information to enable him to verify whether the company's transactions have been properly recorded. That cannot be done at the stage of the written objections that are contemplated by clause 5(b), partly because of lack of time and partly because the procedures that are required to obtain such information do not exist at that stage. Once a reference to arbitration has been made, however, a partner who objects to the accounts will be able to enforce his right to obtain full information about the partnership's financial affairs. Once he has that information, he can formulate more specific objections. In the present case the defender's complaints as set out in the defences include her exclusion from obtaining full information regarding the business of the partnership. Thus the problem of lack of information is directly relevant.

[16] The defender''s letter of 4 April 2005 begins "I am writing to you regarding the amended partnership accounts to voice my objection to these accounts". In my opinion that by itself is quite sufficiently clear to satisfy the requirements of clause 5(b), despite the fact that the objections are not further specified. The further specification of the defender's objections to the accounts will no doubt be provided in the reference to arbitration. At that stage, too, the question of the lack of information will presumably be taken up. That will enable a considered statement of the defender's position, and in due course a considered reply by the pursuers. In my opinion that is precisely the procedure that is contemplated by the contract of partnership.

[17] The defender's letter indicates that she had been in contact with her solicitor regarding the affairs of the partnership. That does not vitiate the considerations in paragraph [12], for two reasons. First, the point in that paragraph is a general one, namely that very often partners who are in dispute with their fellow partners will not take legal advice. The fact that in a particular case a partner has taken legal advice does not negative the general consideration, and obviously similar principles of construction must be applied regardless of whether any particular partner has taken legal advice. Secondly, because one of the defender's principal complaints is lack of information, it must be doubtful whether even a solicitor could have formulated specific objections to items in the accounts within the one month time limit; at the very least, it must be doubtful whether he could have done so comprehensively.

[18] Counsel for the pursuers relied on an analogy with judicial accounts, in the manner set out at paragraph [7] above. In my opinion this analogy is not appropriate. The cases on judicial accounts turn on the construction of Rule of Court 42.4, which provides for the submission of a note of objection to the report of the Auditor of Court following a diet of taxation. That Rule accordingly provides for a form of appeal to the Court from the decision of the Auditor. In such a case it is likely that parties will be legally represented, and in any event they will be in the later stages of formal legal procedures. In those circumstances it is not surprising that the courts have required a degree of formality and specification in the note of objection. A provision in a partnership contract is quite different, in that it is liable to be invoked with little or nothing in the way of prior procedure and may be invoked without the benefit of legal advice.

[19] Counsel for the pursuers also relied on possible forms of alternative wording for clause Fifth(b). In my opinion such an exercise will rarely, if ever, be of assistance in the interpretation of a contract. When provisions in a contract or other legal deed are construed, it will almost invariably be possible to suggest various forms of alternative wording, some of which would make the matter clear on one side and some of which would be clear on the other side. Such an exercise establishes nothing other than the possibility of other forms of wording on both sides. The fact is that the parties have chosen one particular form of words, and it is that form of words that the court must construe. Other forms are irrelevant. Counsel for the pursuers further relied on certain features of the wording of clause Fifth(b), in particular the use of the word "stated" and the use of the word "objections" in the plural. While these expressions lend some support to the pursuers' position, I am of opinion that they are outweighed by the more general considerations discussed in paragraphs [12], [14] and [15] above. In the construction of a commercial document, it is only in very rare cases that niceties of syntax will be decisive; such a document must rather be construed in a common sense fashion, having regard to the underlying purposes of the document and the commercial procedures that reasonable men in the position of the parties are likely to have had in mind. Finally, counsel for the pursuers emphasized that the intention underlying clause Fifth(b) was to provide a procedure for the approval of accounts that avoided undue delay. I do not doubt that this is so; nevertheless, where a dispute occurs the parties must be given a reasonable opportunity to state their cases, and for the reasons stated above I do not think that it is reasonable to expect a partner to provide fully articulated objections to a set of accounts within the one month period specified in clause Fifth(b).

[20] For the foregoing reasons I am of opinion that the primary argument for the defender is well founded, and that the letter of 4 April 2005 is sufficient to constitute "written objections" to the dissolution accounts for the purposes of clause Fifth(b). The alternative argument for the defender was that the letter of 4 April 2005 should be construed in the light of the surrounding factual circumstances, in particular the unresolved disputes among the parties regarding previous sets of accounts. It is not strictly necessary to consider this line of argument in view of my decision on the primary argument. Nevertheless, if I had been against the defender on the primary argument, I would have allowed a proof before answer on the defender's averments relating to the circumstances surrounding the letter. Those circumstances would relate primarily to the objections that had been taken to three previous sets of accounts. In my opinion those objections might well be relevant to the dissolution accounts. A set of accounts of a business is not a free-standing entity. It is normal to find that successive sets of accounts are compiled on the same basis, with any changes in procedure being specifically noted. Many of the figures in one set of accounts are inevitably carried through to the following set. Consequently an error in an earlier set of accounts can clearly have an impact on the latest set. That is why objections taken to earlier accounts are relevant to the dissolution accounts.

[21] Parties were agreed that, if I found in favour of the defender on her primary argument, the proper procedure was to sist the action to permit arbitration to take place. I propose to follow that course. I will accordingly repel the third plea in law for the pursuers and sist the action pending arbitration under clause Fifth(b). I will, however, delay the sist for a period of one week from the date of this opinion to allow a motion for expenses to be made.