Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 132
	OPINION OF LORD MALCOLM in the cause KAREN ELAINE BUCHANAN Pursuer; against (FIRST) JAMES GERARD NOLAN and (SECOND) CHRISTINE MARGARET MACLEOD OR TOMLINSON Defenders: ________________

Pursuer: Ellis QC; Balfour & Manson LLP

First Defender: Upton; Francis Gill & Co

Second Defender: No appearance

21 August 2012

[1] This action concerns a continuing dispute over the financial consequences of the dissolution of a firm of solicitors, namely Messrs Nolan Macleod. The firm commenced in 1986, operating from an office in Glasgow. At that time the partners were the two defenders, Mr James Nolan (the first defender) and Ms Christine Tomlinson (the second defender). In 1991 the first defender moved to additional premises in Kirkintilloch. In December 1995, Ms Karen Buchanan (the pursuer) was assumed as a partner. She worked in the Kirkintilloch branch. That branch dealt with debt recovery and litigation. The second defender conducted a largely chamber practice from the Glasgow office. In 1997 the three partners entered into a contract of partnership. Much of the current dispute turns on the proper meaning and effect of that agreement. The firm continued until April 2004, when it was terminated as a result of a notice issued jointly by the pursuer and the second defender.

[2] This is the second litigation concerning the break up of the firm. The pursuer seeks declarator that the assets and liabilities of the partnership fall to be dealt with according to the terms of section 44 of the Partnership Act 1890. (It has been explained that she refers to section 44 as a shorthand for a dissolution basis reckoning, as opposed to one which assumes that the pursuer has purchased part of the first defender's interest in the firm.) The pursuer claims that the first defender has retained the vast majority of the assets of the Kirkintilloch side of the business. She asks the court to order a full account by the first defender of his intromissions with the assets and liabilities of the former firm in order to ascertain the true balance due by him to the pursuer, and for payment of the same plus interest. Failing an accounting, she seeks payment of £120,750 with interest, which is said to be a reasonable estimate of the sum due and resting owing to her by the first defender.

[3] The first defender counterclaims for payment of £297,812.50 plus interest. It is averred that the pursuer offered to purchase and then acquired goodwill and capital in the firm belonging to the first defender, at least in respect of clients acquired after October 1995. To date she has not paid the purchase price, hence the counterclaim. The dispute is solely between the pursuer and the first defender. The second defender has not entered appearance.

[4] A debate took place at the instance of the first defender. A number of issues were discussed, including the proper interpretation of certain provisions in the partnership contract. Both parties provided full written submissions. I will not attempt to summarise them, but will deal with the issues raised in the course of this opinion. In construing the agreement it is helpful to be aware of the factual background and context, much of which is apparent from the terms of the deed itself. The Kirkintilloch and Glasgow branches operated as, in effect, two separate businesses. Separate trading accounts were prepared. The first defender began the Kirkintilloch enterprise in 1991. He developed its business. The second defender remained in Glasgow with responsibility for that office. When the pursuer was assumed as a partner, it was as a colleague (initially a junior colleague) of the first defender. She worked in the Kirkintilloch office. When the pursuer joined the firm her capital account was nil. By the time of the dissolution she was sharing Kirkintilloch profits and losses equally with the first defender. The present dispute concerns only the Kirkintilloch side of the operation.

The partnership agreement

[5] Clause sixth dealt with the division of the annual balance of profit or allocation of loss. In respect of the Kirkintilloch office, in the first year the first defender was to receive 75% and the pursuer 25% of any profits. The first defender's share reduced incrementally until both parties divided the profits equally. Losses would be borne in the same ratio. So far as the Glasgow office was concerned, the second defender was entitled to take all of the profits. She was solely responsible for any losses.

[6] Clause tenth required the partners to keep regular and distinct books which would be brought to a just and true balance at the end of each September. A contemporaneous balance sheet would be prepared.

[7] Clause eleventh provided that in the event of the death, bankruptcy or insolvency of any partner, he (the masculine includes the feminine) would cease to be a partner and neither he nor his representatives or creditors would have any share, interest or title to interfere with the partnership business or property. His share and interest vested in the remaining partners. The representatives and creditors of the deceasing, bankrupt or insolvent partner would be entitled only to the settlement elsewhere provided in the deed (but not to the exceptions contained in clause fifteenth). The surviving or solvent partners would be entitled to continue the exclusive use of the firm's name for such period as they thought fit.

[8] Clause twelfth provided that, in the event of such bankruptcy or insolvency, the representatives of that partner, or his creditors, would be entitled to the sum at his credit in the immediately preceding balance sheet, subject to any necessary revisals in respect of payments in or deductions since then. Once ascertained the amount due would be paid in equal half yearly instalments over the next four years.

[9] The dispute between the pursuer and the first defender centres on clauses thirteenth to fifteenth. It is convenient to rehearse them in reverse order. So far as relevant, clause fifteenth provided that in the event of dissolution in any manner, the first defender alone was entitled to retain and use the partnership name and to retain any lease over property both heritable and moveable at the discretion of the first defender, and all business files, ledgers, goodwill and any other property or assets referring to any client of the firm dealt with prior to 1 October 1995 (the pre-1995 clients) at the Kirkintilloch address would belong solely to the first defender or his representatives unless otherwise agreed in writing by him. The other partners would have no claim whatsoever to the said business, profit or goodwill emanating from the pre-1995 clients. They undertook not to act for or seek business from those clients for a period of five years from the date of dissolution. Clause fifteenth contained a similar provision for the benefit of the second defender in respect of pre-1995 clients of the Glasgow branch. It was also agreed that the computerised debt collecting system devised by the first defender belonged to the first defender and his representatives.

[10] It is plain that clause fifteenth was designed to allow the first defender, if he so chose, to continue the pre-1995 Kirkintilloch business from the Kirkintilloch office, using the firm name. (The second defender was given no residual right to the firm name.) Obviously, and notwithstanding the reference to "in the event of dissolution in any manner", this entitlement would not arise if Mr Nolan died or if he was declared bankrupt (as is made plain by clause eleventh). It could be exercised if he decided to end the partnership but still continue in practice from the Kirkintilloch premises, or if a notice of dissolution was served upon him under clause fourteenth.

[11] Turning to clause fourteenth, it provided that any partner wishing or being required to retire should give three months notice in writing to the other partners of the intention to retire at the expiry of that notice. The books of the firm would be brought to a balance at the expiry of the notice, or, if no notice was given, three months after the date of actual retiral. Furthermore, in the event of "irreconcilable differences", two partners could require the other to resign with the books being balanced three months thereafter. (As mentioned earlier, the firm of Nolan Macleod was dissolved by service of such a notice upon the first defender.) The outgoing partner was obliged to sign a partnership continuation agreement for revenue purposes.

[12] So far as relevant for present purposes, clause thirteenth (a) provided that if the first defender died, or if he gave notice of his intention to retire from the business in terms of clause fourteenth, in other words a voluntary retirement on his part, the pursuer could purchase his share in the capital and goodwill of the Kirkintilloch business, failing which the option would fall upon Mrs Tomlinson, failing which it could be sold upon the open market and the proceeds used to make payment to the retiring partner or his representatives. There was no exclusion of the pre-1995 clients. The term "business" was unqualified. In my view this provision assumed and proceeded upon the basis that the first defender had decided to end his involvement in the Kirkintilloch business. In such circumstances the entitlement and associated benefits reserved to the first defender in clause fifteenth would not arise. (Were it otherwise, it would not be possible to reconcile clauses thirteenth (a) and fifteenth.) The same would apply if clause thirteenth (a) was invoked because of the first defender's death.

[13] Clause thirteenth (b) made provision for the valuation of the goodwill of the Kirkintilloch business, and for payment of the value due to the retiring partner or his representatives over three years. It also dealt with the division of the goodwill as between the pursuer and the first defender. Failing an alternative agreement, the pre-1995 goodwill was attributable solely to the first defender, with the rest divided equally between him and the pursuer. Thus, if the pursuer was effecting a purchase under clause thirteenth (a), unless otherwise agreed, she would require to buy three-quarters of the Kirkintilloch goodwill. This is consistent with the history of the respective parties involvement in the firm and the general structure of the agreement as a whole.

[14] Clause thirteenth (c) dealt with the valuation of the goodwill of the Glasgow business on the death or retirement of the second defender. The other partners would have no claim to the goodwill of that part of the business except in respect of goodwill attributable to clients referred to the Glasgow office by either the first defender or the pursuer.

[15] Clause thirteenth (d) specified the date of the balancing of the books in the event of the death or retiral of a partner, and provided for the ascertainment of the amount at debit or credit of that partner. Provision was made for deferral of the payment of any sum at credit by way of half-yearly payments over three years.

The meaning and effect of clauses thirteenth to fifteenth

[16] As one would expect, the general structure of the partnership agreement reflected the background to it and the subsequent operation of the firm. By the date of dissolution in 2004 the first defender and the pursuer were, in effect, equal partners in respect of the debt recovery and litigation business carried on in Kirkintilloch, subject to the first defender's entitlements under clause fifteenth. The other partner owned the Glasgow side of the business. If and when the first defender died or decided to retire, the pursuer had first option on buying out his share of the business, including his majority share of the goodwill in the Kirkintilloch operation, failing which the option could be exercised by the remaining partner, failing which the first defender's share in the business was to be sold on the open market and the proceeds given to him or his representatives. In the event that the partnership was brought to an end, but the first defender intended to continue in business at Kirkintilloch, provision was made in clause fifteenth to allow him to do so on the basis of the clients who had used his services before the involvement of the pursuer in 1995. The other partners would have no claim on those clients. The first defender could retain the sole use of the firm name, along with the premises and other property necessary to carry on the business from the Kirkintilloch office. In such an eventuality there would be no room for the operation of the buy out provisions in clause thirteenth. The first defender could not both continue the pre-1995 Kirkintilloch business from the same office using the firm name, and sell his share in the business to one of his partners or on the open market. All of this still leaves the question of what can be called the post-1995 Kirkintilloch business, i.e. the value of the Kirkintilloch business at dissolution less the assets retained by the first defender in terms of clause fifteenth.

[17] While there are certain factual matters in dispute, there is no controversy concerning the following. After service of a notice of dissolution dated 21 January 2004 upon the first defender by the pursuer and second defender under and in terms of clause fourteenth, the partnership was brought to an end with effect from 21 April 2004. The pursuer purported to exercise an option to purchase the first defender's share of the Kirkintilloch business in terms of clause thirteenth (a). The parties then embarked upon a dispute as to whether that option covered the items which clause fifteenth reserved to the first defender, including the pre-1995 clients. Meantime the first defender has continued to operate from the Kirkintilloch office. The pursuer moved to the Glasgow office. That disagreement has now been resolved on the basis that the first defender is entitled to those items reserved to him by clause fifteenth. However the first defender insists that the pursuer, having exercised an option under clause thirteenth, is obliged to buy his share in the post-1995 Kirkintilloch business. The pursuer's counsel, Mr Ellis QC, submits that this does not arise, in that the first defender has not retired but has continued in practice, much as before, from the Kirkintilloch office.

[18] It will be apparent from my earlier remarks that I prefer the pursuer's approach on this point. In my opinion, once the first defender chose to exercise his entitlements under clause fifteenth and continued in practice, albeit on his own account, from the Kirkintilloch premises, the buy out provisions in clause thirteenth ceased to have any application. In other words he elected to exercise his rights under clause fifteenth rather than end his involvement in the Kirkintilloch branch. As mentioned earlier, clause thirteenth (a) envisaged a situation where the pursuer was purchasing the first defender's share in the business. Once clause fifteenth was invoked, clause thirteenth (a) had no application. It can be noted that when the pursuer sought to exercise an option to purchase under that clause, she thought that she was buying out the first defender - but she now concedes his rights under clause fifteenth. There is no basis for now treating the option as covering some lesser interest belonging to the first defender. The result is that the pursuer is not obliged to purchase the first defender's share of the post-1995 Kirkintilloch business. However she is entitled to her own fifty per cent share of that part of the business of the former firm.

[19] After the dissolution the pursuer obtained the files of some of the clients of the Kirkintilloch branch, and, according to her, a motor car and a laptop computer. The first defender contends that she was given her entire entitlement in terms of the purported exercise of her option to purchase his share of the post-1995 Kirkintilloch business. In other words he claims that he retained the pre-1995 business, and she acquired the rest. The first defender's contentions proceed upon the hypothesis, which I have rejected, that an option to purchase exercised under clause thirteenth (a) could apply to the post-1995 business alone.

[20] The pursuer avers that the reality is that the first defender has retained the vast bulk of the post-1995 clients and business. That is the basis for the estimate of the sum said to be due to her in the accounting. In other words, despite the purported exercise of the option to purchase, the pursuer no longer insists upon it. She now asks for an accounting on a dissolution basis, while acknowledging the first defender's right to the clause fifteenth assets. In my view, that position reflects her post-dissolution entitlement.

[21] By way of the counterclaim the first defender insists that the pursuer should be held to her purported option to purchase, which he submits covers all of the post-1995 business. He also contends that the pursuer has received all that she is entitled to in that regard, and therefore he is entitled to payment therefor. For the reasons given earlier, in my view the counterclaim is misconceived. The first defender is entitled to the clause fifteenth assets plus his equal share of the rest of the Kirkintilloch business. I will uphold the pursuer's motion that I should dismiss the counterclaim.

[22] There is an important outstanding issue as to the nature and extent of the post-1995 Kirkintilloch business, and as to the amount of it which was transferred to the pursuer by the first defender. If the pursuer received more than her share she will be in debt to the first defender; and vice versa if he retained more than fifty per cent. The pursuer seeks an accounting of the first defender's intromissions with the Kirkintilloch assets. In his pleadings the first defender does not dispute a liability to account to his former partner. He claims to have already made over the relevant records to the pursuer, but this does not elide his duty to provide a formal accounting.

Work in progress

[23] I was asked to address a separate issue of construction of the agreement in order to resolve a dispute concerning work for pre-1995 clients which was in progress in the Kirkintilloch office at the date of dissolution. The question is: does that work in progress (WIP) belong to the first defender alone in terms of clause fifteenth, taking it beyond any claim of the pursuer, or is it to be dealt with in the same way as work in progress relating to post-1995 clients? This turns on whether it falls within the phrase "...all business files, ledgers, goodwill and any other property or assets referring to any client of the first defender dealt with prior to 1 October 1995 ...". If the answer is yes, such WIP belongs solely to the first defender.

[24] On behalf of the first defender Mr Upton submitted that WIP at the date of dissolution is an "asset", and, on a straightforward reading of clause fifteenth, WIP relating to pre-1995 clients is reserved to the first defender alone. Pre-1995 clients always remained the clients of the first defender, not of the firm. Reference was made to the case of Bennett v Wallace 1998 SC 457, but I see nothing in the decision in that case which assists in the particular circumstances of the present dispute. Other texts cited by Mr Upton vouch that WIP is an asset, which, other things being equal, must be accounted for in some way; but this takes one little distance in resolving the question at issue.

[25] Turning to the submissions on this point for the pursuer, there was a time when she challenged the first defender's right to retain the assets listed in clause fifteenth. This is no longer maintained. However, according to Mr Ellis the clause fifteenth assets do not include any work in progress at the time of dissolution, even if relating to pre-1995 clients. The purpose of clause fifteenth was to deal with post-dissolution ownership of the premises, use of the partnership name, and the ongoing relationship with pre-1995 clients. Up to the date of dissolution, the position in respect of profits was covered by clause sixth, which referred to "all profit and loss shown in the annual trading profit and loss account". All profits from the Kirkintilloch business, whatever the source, were to be divided equally between the pursuer and the first defender. It was submitted that it would make no commercial sense for clause fifteenth to interfere with that arrangement.

[26] Mr Ellis stressed that the first defender continued to operate from the Kirkintilloch office and enjoyed a continuing right to exploit the pre-1995 business. However this entitlement did not extend to profits gained up to the date of dissolution. The pursuer has the right to her share of any and all Kirkintilloch profits gained during the currency of the partnership, all in line with the normal operation of the firm in previous years.

[27] In a short reply Mr Upton stressed the proposition that clause fifteenth is clear in its terms. It "trumps" any apparently contradictory provisions in the partnership agreement. It is a simple matter to remove WIP relating to pre-1995 clients from the accounts.

[28] Largely for the reasons given by Mr Ellis, I am of the opinion that clause fifteenth does not entitle the first defender to retain all of the profits attributable to work in progress relating to pre-1995 clients in the period between the previous set of accounts and the date of dissolution. The partnership contract is to be construed as a whole. Clause sixth governs the distribution of profits during the currency of the partnership. By 2003/4 all profits of the Kirkintilloch business, including any attributable to pre-1995 clients, were to be divided equally between the first defender and the pursuer. I construe clause fifteenth as regulating the position post-dissolution if and when the first defender chose to exercise his entitlements thereunder. In that circumstance clause fifteenth allowed him to retain the listed assets. The language used in clause fifteenth reflected this intention. "In the event of dissolution" the first defender "can retain and use the partnership name". He can "continue or be assigned" any lease. "All business files, ledgers, goodwill and any other property or assets referring to any client of the firm dealt with prior to 1 October 1995...shall belong solely to James Gerard Nolan...." (emphasis added). I do not interpret this provision as extending to profits attributable to pre-1995 clients WIP gained in the period before dissolution. That would be an innovation on the earlier structure of the agreement, and in particular on that envisaged by clause sixth. In my view such an innovation would require clear and express wording in clause fifteenth. To my mind it makes sense if clause fifteenth is confined to the post-dissolution period. Earlier I explained the purpose of clause fifteenth. It can be achieved without the inclusion of any pre-dissolution work in progress in the list of assets to be retained by the first defender.

Concluding remarks

[29] In his note of arguments the first defender posed two main questions: (1) has the pursuer pled a sufficient basis to justify an obligation on the defender to account to her judicially?; (2) in terms of the counterclaim, is the pursuer obliged to make payment to the first defender in respect of her exercise of a right to acquire a defined interest of his in the partnership?

[30] For the reasons already given, I answer the second question no. I answer the first question yes. Mr Upton raised various points of alleged lack of fair notice, inadequate specification and contradictory averments on the part of the pursuer. In reply to the first defender's complaints as to a lack of specific averment as to the assets retained by the first defender, Mr Ellis observed that only the first defender can answer these questions, hence there should be an accounting. There is much force in that response. Furthermore, some of the uncertainties in the pursuer's pleadings stem from the references to the purported exercise of the clause thirteenth (a) option to purchase. Given that the first defender invoked his right to remain in practice in the Kirkintilloch branch, and decided to take advantage of clause fifteenth, it is not surprising that these averments have the potential to confuse and complicate matters. My decision as to the proper interpretation of the contract and its application to the current circumstances should resolve these uncertainties, and also Mr Upton's submission that the pursuer should have raised an action of implement or brought a claim in damages in respect of the exercise of the option.

[31] In my view the uncontentious facts demonstrate that the pursuer is entitled to a formal accounting. Indeed parts of the first defender's averments concede as much. None of the various complaints as to the pursuer's averments would justify refusal of an accounting, nor require further pleading on her part. They raise no points of major importance. This opinion should assist in respect of the context and essential purpose of the accounting, and dispel some of the legal disputations which have clouded the issue so far. Indeed I hope that the parties may find it possible to resolve matters now with the minimum of further formal procedure, for example by way of a mutually agreed and binding remit to a man of skill.

[32] The court was given a large number of questions which it was invited to answer. However I have preferred to deal with the issues in the course of the above narrative. I consider that I can reflect the terms of this opinion by dismissing the counterclaim and making an order for an accounting which will allow the ascertainment of any balance due and resting owing to either the pursuer or the first defender. There is room for discussion as to the most appropriate terms of the interlocutor, thus, before making a substantive order, I shall give parties an opportunity to make written representations on the issue. If necessary, I shall arrange a by order hearing.