Scottish Court of Session Decisions

[2] Following the dissolution of the partnership, certain provisions of the contract of partnership came into operation. Clause Tenth applies in the event of dissolution of the partnership by notice; that clause provides that, if the parties to whom such notice is given intend to continue the partnership business, a balance sheet is to be made up as at the date of dissolution in terms of clauses Fifth and Ninth (b) in order to show the sum standing at the credit or debit of the retiring partner. If that sum is a credit, clause Tenth (One) states that it should be paid to the retiring partner in accordance with the terms of clause Ninth as if he or she had died at the date of dissolution. Clause Ninth applies "In the event of the determination or dissolution of the partnership" on various bases, including death and permanent incapacity; the effect of clause Tenth (One) is that clause Ninth applies as if the retiring partner or partners had died. So far as material, Ninth (b) is in the following terms:

"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... by six equal half yearly instalments commencing six months after the date of determination with interest (in the event of dissolution by permanent incapacity or death but not otherwise) also payable half yearly on the same date [at the Clydesdale Bank's] Base Lending Rate for the time being on the amount from time to time outstanding, with power to the surviving or continuing Partners to anticipate payment of all or any of said instalments with corresponding reduction of interest".

Clause Fifth (a) provides that a balance sheet and relative profit and loss account are to be made up on 31 May in each year by the partnership accountants and that, when these have been signed and docquetted, the balance sheet will fix conclusively the sum at credit or debit of each partner. Clause Fifth (b) makes provision for approval of the balance sheet and profit and loss account prepared by the accountants. If the balance sheet and profit and loss account remain unsigned one month after they have been submitted to a partner they are held to have been approved by him or her unless written objections have been stated by the partner within that period. Thereafter, failing agreement among the partners, any such objections are to be referred to arbitration under clause Thirteenth, and the decision of the arbiter on the objections is to be binding as among the partners.

[3] After dissolution of the partnership, the partnership accountant prepared a draft balance sheet as at 30 November 2003, the date of dissolution, and relative profit and loss account. An amended version of the draft balance sheet and accounts was issued on 8 March 2005. On 4 April 2005 the defender wrote to the partnership accountant indicating that she wished to challenge certain aspects of the draft accounts. The pursuers disputed that her challenge was a valid objection in terms of clause Fifth of the contract of partnership, and claimed that draft balance sheet and accounts had become final. They accordingly raised the present action for payment of the sums that were shown by the draft balance sheet as due to them. In her defences the defender contended that she had validly objected to the accounts in terms of clause Fifth (b) of the contract of partnership and that her objections should be referred to arbitration. Following a debate, I decided that the defender had validly objected to the balance sheet and accounts. Consequently by interlocutor dated 5 December 2006 I sisted the action to permit arbitration to take place. The arbiter heard parties at a proof before answer, and by note dated 3 March 2008 he rejected the defender's objections to the accounts. On 27 March 2008 he issued a final order which held that the final balance sheet as at 30 November 2003 as prepared by the partnership accountants was correct and final. The result of the arbiter's decision is that the pursuers' individual capital accounts as shown on the balance sheet as at 30 November 2003 are as follows:

[4] The pursuers now conclude for payment of those sums together with certain amounts by way of interest. They aver that under clause Ninth (b) of the contract of partnership the sums due to them fell to be paid by six instalments, starting six months after dissolution of the partnership. Thus the first instalment was payable on 30 May 2004 and further instalments were payable every six months thereafter until 30 November 2006. Interest is averred to be due from 30 November 2003, the date of dissolution of the partnership. It is calculated on the basis that under clause Ninth (b) the interest currently due ought to have been paid every six months, and interest is claimed on the interest that is said to be so due. The defender no longer disputes that the sums standing at the pursuers' individual capital accounts will be due by her. She contends, however, that her obligation to pay those sums crystallized only when they were finally determined; and that occurred when they were determined by the arbiter, on 28 March 2008, that being the date when he issued his order and signed the closing balance sheet. Consequently the defender avers that the first instalment of the sum payable to the pursuers will be due for payment on 28 September 2008, six months after the date of the arbiter's determination. Five further instalments will be due thereafter at six-monthly intervals. No interest is currently due, and interest will only be payable in future if an instalment is paid late. Thus the dispute that now exists between the parties relates to two matters: the date when the sums due to the pursuers by the defender are payable, and the interest that is due on those sums. Both matters turn on the construction of clause Ninth (b) of the contract of partnership. It was agreed that the relevant facts were not contentious and that the matters in dispute could be determined by debate.

Submissions
[5] Clause Ninth (b) of the contract of partnership provides that the sum at credit of the outgoing partner is to be paid "by six equal half yearly instalments commencing six months after the date of determination". At debate counsel for the defender submitted that the expression "date of determination" was crucial. That expression, used in clause Ninth (b), had a meaning different from the expression "date of dissolution" used in the same clause. Different expressions were used in the same subparagraph of the clause, and it was reasonable to assume that the difference in wording was deliberate; thus the intention was that two distinct dates were specified. The word "determine" could in some contexts mean bring to an end, but in clause Ninth (b) the word "dissolution" was used to signify the ending of the partnership, and "determination" referred to the determination of the capital sums that were due to the outgoing partners in terms of clause Fifth (b); such determination could occur through a failure to object to the accounts or by agreement among the partners or by virtue of the decision of an arbiter. "Dissolution" and "determination" and other cognate words were used elsewhere in the contract of partnership. Moreover, clause Seventh (b), which dealt with partners' granting caution for third parties or entering into speculative ventures, stated that a partner might, on the decision of the arbiter, be declared to have ceased to be a partner as from the date of contravention; that subclause further provided that the partner should thereupon be paid out in the same manner as on bankruptcy. Thus, where it was intended that the decision of an arbiter should have retrospective effect, that was provided for in the contract. Clause Ninth (b), by contrast, did not provide for retrospective effect.

[6] Counsel for the defender further submitted that the foregoing construction accorded with business common sense. That could not be said of the pursuers' construction of clause Ninth (b). On the pursuers' construction, all of the payments due by the defender should have been made by November 2006, but the full amount to be paid by her was not determined until March 2008; moreover, the accounts as finally approved by the arbiter were different in certain respects from those originally put forward by the partnership accountants. On that basis, the defender's obligation to pay had crystallized before its amount was known. Thus it was possible that the defender might have overpaid the pursuers before the true amount due was finally determined. In that event a term would require to be inserted into the contract to permit repayment to take place. Moreover, on the pursuers' construction interest at a significant rate ran throughout the period from dissolution of the partnership on all sums outstanding. That, counsel submitted, was not a fair and reasonable outcome.

[7] On the basis of the foregoing arguments, counsel for the defender submitted that no sum was due by the defender until 27 August 2008, that being six months after the date of the arbiter's decision. The pursuers' pleadings were accordingly irrelevant, and the action was premature and should be dismissed.

[9] In relation to the meaning of the word "determination" as used in clause Ninth (b), counsel accepted that it could in some contexts denote the decision of an arbiter. In the context of the present agreement, however, he submitted that it clearly referred to the ending of the partnership. At the start of clause Ninth, it was provided that the provisions of the clause would operate "In the event of the determination or dissolution of the partnership" in terms of clause Seventh or Eighth. In that expression the two words "determination" and "dissolution" were clearly used as synonyms. When "determination" was used later in clause Ninth it must be assumed that it had the same meaning. Moreover, clause Ninth (b) required that a balance sheet be made up as at the date of dissolution, and the sum at credit of the outgoing partner was to be ascertained from that balance sheet and paid by the surviving or continuing partners to the outgoing partner. That indicated that dissolution was the critical date for the purposes of the clause. Finally clause Fifth, dealing with arbitration, envisaged that it should be a reasonably quick process. In that event, it was not unreasonable that the first instalment of the sum due to an outgoing partner should be payable six months from dissolution. The fact that the amount due might be fixed after that date was in any event immaterial. The amount of a sum due by one person to another was frequently assessed after the date when it was due; that was true of the vast majority of claims for debt or damages.

Decision
[10] The critical issue in the present debate is the meaning of the expression "date of determination" as used in clause Ninth (b) of the contract of partnership. Parties were in agreement as to the proper approach that should be taken to issues of contractual construction. The starting point was the ordinary and natural meaning of the words used by the parties, read in context. That context consisted of both the whole terms of the contract and any relevant background information about the commercial purposes of that contract. A commercially sensible construction should be adopted; unreasonable results should be avoided.

"In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language":