England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION ( MR JUSTICE LLOYD)

		Royal Courts of Justice Strand, London, WC2A 2LL
		20th June 2003

Lord Justice Mummery :

Introduction

1. This is a partnership case now proceeding in the Chancery Division. It started life as an action in the Queen's Bench Division. The claimant sought a money judgment for the sum of £110,000 (with interest) which, she alleged, she had lent to the defendants and was due for repayment. In their defence and counterclaim the defendants denied that the relationship between the parties was that of creditor and debtor. They contended that there was a partnership between the claimant and the second defendant.
2. The judge (HHJ MacDuff QC) dismissed the claim for repayment of a loan. By his order of 29 March 2001 he made a declaration that an equal partnership at will existed between the claimant and the second defendant, that it commenced trading on 1 May 1999 and that it was dissolved on 29 September 1999. The order directed that the affairs of the partnership should be wound up. He adjourned the taking of all necessary accounts and enquiries to a Master of the Chancery Division.
3. The partnership in question was a retail pharmacy business, Ashworth's Pharmacy, at 64 Ruislip High Street, which had been carried on by the second defendant as a sole trader from 1986 until 1 May 1999, when the partnership commenced trading.
4. In the course of taking the dissolution accounts a disagreement arose about the correct treatment in the accounts of the sum of £110,000, which the judge had held was not a loan. A series of payments totalling that sum was made by the claimant into the current bank account of Ashworth's Pharmacy over a period of five months prior to the commencement of trading by the partnership.
5. In his decision of 1 July 2002 Master Bowman read HHJ MacDuff's judgment as deciding that the payment of £110,000 was a capital contribution by the claimant to the partnership. He accordingly struck out a claim by the second defendant, which was contained in a witness statement in the proceedings for the account, that the £110,000 had been paid to her by the claimant as the price for acquiring a half share in the business and that she was entitled to use the purchase price as she pleased.
6. On the second defendant's appeal against Master Bowman's striking out order Lloyd J took a different view. On 26 September 2002 he allowed the second defendant's appeal. In his judgment the rule in Henderson –v- Henderson (1843) 3 Hare 100, which is designed to bring finality to litigation by requiring the parties to bring forward their whole case in respect of the subject matter of the litigation, precluded the claimant from denying that she had paid the total sum of £110,000 to the second defendant as the purchase price for a half share in Ashworth's Pharmacy. Lloyd J's ruling makes a significant difference to the respective financial positions of the parties on the accounts. In the revised dissolution accounts prepared by the second defendant as at 30 September 1999 the claimant was shown as owing over £43,000 to the second defendant, who was treated as having introduced £110,000 capital into the partnership, even though HHJ MacDuff had described the claimant in several passages of his judgment as having made an "investment" of £110,000 in the business only months before the partnership started trading. In these circumstances the claimant has been allowed to bring a second appeal with the permission of Aldous LJ.

The Facts

7. The hearing before HHJ MacDuff QC was the trial of the action. The parties gave oral evidence. Findings of fact were made. The obvious starting point for the resolution of the present dispute is the extempore judgment delivered on the issues identified in the pleading of the claim and of the cross claim. The crucial question is: what was the decision of the trial judge as to the basis on which the claimant had paid £110,000?
8. The essential issue in the Queen's Bench action was whether the legal relationship between the parties was that of (a) lender and borrower or (b) partners. On that issue it was for the second defendant, as the party alleging that there was a partnership and counterclaiming for the winding up of its affairs, to plead the facts relevant to its formation and the terms on which the partnership was entered into. In paragraph 8(i) of the defence it was pleaded as an express term of the partnership agreement that

"(i) the claimant would pay the second defendant a sum of £110,000 to acquire a 50% share of "Ashworth's Pharmacy". The said sum was notionally attributed in the following manner; £60,000 for good will [the second defendant had received an offer of £120,000 for the goodwill of Ashworth's Pharmacy in October 1998], £30,000 for existing stock and £20,000 in a capital contribution towards half of the costs of refitting the premises;

(ii) that the claimant and the second defendant would share equally profits and losses of "Ashworth's Pharmacy"."

9. In the reply and defence to counterclaim the claimant denied such an agreement. She alleged that, in discussions between the parties, she had made it clear that, if she was to consider being involved in the business, she would need to be supplied with information, such as 3 years' accounts. That information was never provided to her at any time. She also alleged that she had made it clear that, if she became involved with the pharmacy business, it would be through a limited company and the claimant's equity in the company would be determined by the financial information provided at the level of the claimant's investment.
10. There was no express pleading by either side on the specific question as to how the sums paid by the claimant into the current bank account of Ashworth's Pharmacy were to be dealt in the dissolution of the partnership, should the court hold that there was a partnership. The dispute focused on the more general issue whether there was a loan or a partnership. The determination of that issue was the focus of the judgment.
11. It was perfectly possible for the parties to plead and argue the issue as to whether there was a loan agreement or partnership agreement and for the judge to resolve that issue, without the judge having to decide at that stage all the issues that might arise between the parties in the dissolution of the partnership. In a partnership action, especially where the partnership agreement was oral rather than by deed, it is not uncommon for issues to arise on the taking of the accounts in the course of winding up and for those issues to be directed to be tried in order to determine the legal and factual basis on which the accounts should be taken.
12. I should now turn to the facts set out in the judgment of the trial judge. It is only necessary to highlight the main facts. Many of them were never in dispute.
13. From late 1986 the second defendant conducted the business of Ashworth's Pharmacy. The claimant, who had been a close friend of the second defendant, was also a dispensing chemist. In October 1998 the parties made an oral agreement. In broad terms the agreement was that

"for an investment into the business by the claimant of £110,000 she would be an equal partner/owner/participant."

14. Between October 1998 and February 1999 the claimant paid the total sum of £110,000 in the form of cheques and in one case in the form of bank transfer. All the cheques and the bank transfer were made to the current account of "Ashworth's Pharmacy." The individual sums were paid as follows: £6,000 on 27 October 1998; £40,000 on 18 November 1998; £4,000 on 10 December 1998; £6,000 on 19 January 1999 and £54,000 on 18 February 1999.
15. The total sum of £110,000 was arrived at as a result of the second defendant putting forward a valuation of the goodwill at £120,000 (the sum for which an offer had been made in negotiations with a third party), a valuation of stock at £60,000 and the requirement of an injection of £40,000 for refurbishment. Those sums added up to £220,000, which was then halved to produce the claimant's contribution of £110,000.
16. At the times when the oral agreement was reached and when the unsecured payments were made by the claimant, Ashworth's Pharmacy was in a "precarious financial position." It was in danger of losing cosmetic agency contracts. It needed an injection of capital into the business, in particular for refurbishment, which went ahead in the early part of 1999 using the capital injected by the claimant.
17. In holding that the agreement was not a loan agreement, as alleged by the claimant, but was, as alleged by the defendant, an agreement to pay money into the business and become equal partners in Ashworth's Pharmacy with trading to commence on 1 May 1999, the judge made it clear that he preferred the defendant's evidence. He found that the claimant was an unreliable witness. He accepted the defendant's evidence that the payments were not made by way of loan, but as an investment as

"a provision of capital for the purpose of buying herself into one half of the business."

18. It was, he held, an investment made by the claimant in a joint enterprise. A business partner was required who " could inject some capital into the business" which was in difficulty. The judge held that it was agreed that, as the business developed, the second defendant and the claimant would draw a monthly sum of £750. The £110,000 was treated by the claimant

"as her payment for becoming a partner in a joint enterprise and never treated these monies as a loan."

19. The judge concluded his judgment as follows:

"This was, I hold, a partnership, was intended to be a partnership. It was never a loan. A partnership was created and it follows that the claimant's claim must fail, must be dismissed, and there must be judgment for the defendants on the claim. I think there must also follow a judgment on the counterclaim …"

The Issue on the accounts

20. The issue on this appeal arose on the taking of the accounts. As directed by the Master on 27 March 2002 the second defendant served a witness statement supporting a dissolution account and the claimant served a witness statement verifying points of dispute in respect of the dissolution accounts by the second defendant. In her witness statement (paragraph 23) the second defendant stated

"I had throughout this matter said that the relationship between the claimant and I was that of a partnership. The sum of £110,000 paid by the claimant was for the purchase of a 50% share of the business trading at the premises. The £110,000 paid by the claimant effectively belonged to me."

21. Master Bowman struck out that statement on the ground that the position contended for in it was not correct. In his judgment the Master said

"However, looking through the judgment and the portions of it which are relied upon by the claimant and which are set out in the skeleton argument deployed on her behalf, it would be difficult, I think, to reach the conclusion that the position contended for on the part of the second defendant is correct. Everything the learned judge has to say is directed towards the sum of £110,000 being an investment in the partnership and not a sum paid outright to the second defendant to do with as she would."

22. The Master's reading of the trial judge's judgment was, therefore, that the sum of £110,000 paid by the claimant was contributed as an investment of a capital sum by her in the partnership business. It did not belong to the second defendant to do with as she wished.

The Appeal to Lloyd J

23. In allowing the second defendant's appeal, Lloyd J took a different view on the effect of the judgment of the trial judge. He disagreed with Master Bowman. In his view the Master should have reached the conclusion that it was not open to the claimant to deny the assertion made by the second defendant in paragraph 23 of her witness statement. On his analysis the claimant's contention that she had invested a capital contribution to the partnership was a new claim, which ought to have been raised at the trial. The trial judge was asked to determine the terms of the agreement made between the parties in October 1998 and whether the sum of £110,000 was paid by the claimant in the context of a loan agreement or a partnership agreement. If the point had been made at the trial, the judge could have decided, in holding that there was a partnership, what the terms of it were concerning the £110,000. The claimant had sought to raise, on the taking of the account, an issue, which had been before the trial judge for decision, namely the basis of the payment of the £110,000. The claimant's case of the capital contribution to the partnership was inconsistent with the terms pleaded by the second defendant in her defence and accepted by the judge. There were no special circumstances which would make it appropriate for the claimant now to raise this point. It would mean going back over the evidence, which had already been given at the trial. After considering the well known principle laid down in Henderson –v- Henderson Lloyd J concluded in paragraph 86 of his judgment

"Accordingly, it seems to me that the Master was wrong in his reading of the judgment. Indeed the conclusion he should have reached is the opposite of the one he did reach, namely, not just that it is open to the second defendant to advance the contention which she does, but it is not open to the claimant to deny it."

Discussion

24. My first reaction on reading the judgments given in this litigation by HHJ MacDuff, Master Bowman and Lloyd J was that Lloyd J's analysis of the position was correct. There was undoubtedly before the trial judge an issue as to the basis on which the claimant paid sums totalling £110,000. The defence to the claim that it was a loan repayable on demand was that the parties had agreed to enter into a partnership on the terms pleaded. It was pleaded in paragraph 8(i) that it was an express term of the partnership that the claimant would pay the second defendant the sum of £110,000 to acquire a 50% share of Ashworth's Pharmacy. There was an opportunity for the claimant to plead in the reply and defence to counterclaim that the £110,000 was invested as a contribution to the capital of the partnership and not as payment to the second defendant as purchase price for a half share in the business. That could have been advanced by the claimant as an alternative case. It was not. The claimant's pleading was simply a denial that there was a partnership at all. Thus, in a general sense, the claimant was seeking to raise on the taking of the accounts a point which could have been raised at the trial, but was not. It can be argued the principle of Henderson –v- Henderson ought to be available to the second defendant to prevent the claimant raising a point, which she had not taken the opportunity to raise when the loan/partnership dispute was tried by the judge.
25. I have, however, been persuaded by Mr Lord QC that Lloyd J's conclusion is not correct. There were three relevant possible readings of the trial judge's findings as to the basis of payment of the £110, 000. One was that he had decided the point in favour of the claimant, as Master Bowman held. The second was that he had decided the point in favour of the second defendant, as Mr Moraes contended on behalf of the second defendant. The third was that the trial judge had not decided, and did not need to decide, the loan/ partnership dispute in such a way so as to determine the treatment of the £110,000 in the accounts. If that were the case then, subject to the possible application of Henderson v. Henderson, the right course would be to allow the appeal, for the evidence of the second defendant to stand and for this court to say to say nothing which would preclude the claimant from arguing before the Master on the taking of the account that the position was as she contended, namely a capital contribution.
26. In my judgment, the trial judge did not in fact decide either that the sum of £110,000 was paid by the claimant to the second defendant solely by way of purchase price for the acquisition of half share in the partnership or that the £110,000 was paid exclusively by way of a capital contribution to the partnership, which should be shown on the accounts as a sum due to the claimant.
27. The crucial question is what was the claimant paying the £110,000 for? It seems to me that the judge regarded the payment as serving two purposes, neither of which was a loan: first, it was the provision of capital to the partnership to be used in the business for refurbishment of the premises; secondly, it was part of the deal that the claimant would become an equal partner in the business with the second defendant and acquire an half share in it. Those findings were sufficient to dispose of the claim that the payment was by way of loan and to conclude that there was a partnership agreement between the claimant and the second defendant.
28. How should the sum of £110,000 be dealt with in the accounts? That point was not canvassed before the trial judge in the pleadings or in the submissions. It was not decided by him. It was unnecessary for him to decide the point at that stage. Nothing he said concluded the matter clearly one way or the other. It was an issue which could properly be raised when the accounts came to be taken.
29. In those circumstances this appeal should be allowed. There was no decision by HHJ MacDuff on the proper treatment of the payment of the £110,000 in the taking of the partnership accounts of Ashworth's Pharmacy. The claimant is not precluded by his judgment or by the rule in Henderson v. Henderson from contending that the sum was not paid by her to the second defendant to do with as she pleased.
30. The matter should be remitted to the Master to determine the following issues in the taking of the account, which is fixed for hearing by Master Bowman on 2 and 3 July 2003 :-

(1) whether, notwithstanding the declaration contained in the order of HHJ MacDuff dated 29 March 2002 that an equal partnership at will existed between the claimant and the second defendant which commenced trading on 1 May 1999 and was dissolved on 29 September 1999, the capital shares of the partners were equal or unequal and, in either case, their amount as at the commencement of trading and the date of dissolution of the partnership;

(2) whether the profits and assets of the partnership are to be distributed, or its losses paid, in equal shares or on some other, and, if so, what basis.

Lord Justice Dyson

31. I agree. I wish to add a few words of my own to explain why the principle of Henderson v Henderson [1843] 3 Hare 100 does not apply in the present case. The principle has usually been applied where A litigates with B to judgment, and then starts fresh proceedings against B raising a case which could and should have been raised in the first proceedings. As Lord Bingham of Cornhill said in Johnson v Gore Wood [2002] 2 AC 1, 30A the public interest which underlies the principle is there should be "finality in litigation and that a party should not be twice vexed in the same matter". What is unusual about the present case is that the judge held that the principle applied in relation to separate stages of the same litigation.
32. The judge said that the claimant ought to have raised her contention as to the basis on which the £110,000 was paid (on the footing that it was not a loan) "if at all at the earlier stage when the witnesses were before the court giving evidence. The court could have come to a conclusion on all issues when deciding the question of loan or partnership and if it had been raised, the further issue, if partnership, then on what terms?" (para 81). He added (para 83) that if the claimant were permitted to raise the point now, this would allow her to "open the same subject of litigation in respect of the matter which might have been put forward as part of the subject in contrast (sic), but that was not put forward at the trial". There were "no special circumstances…. such as to make it appropriate to allow the point to be raised again" (para 85).
33. These excerpts show clearly that the judge was applying the precise words used by Sir James Wigram V-C in the classic passage at pp 114-5 of his judgment in Henderson v Henderson. But the scope of the rule in Henderson v Henderson was explained and amplified by Lord Bingham in Johnson v Gore Wood. At p31C, he said:

"… and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not. ….. Whilst the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party's conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances."

34. In my view, the judge applied the rule too rigidly. He failed to adopt the "broad merits-based judgment" to which Lord Bingham refers, and failed to ask the question whether in all the circumstances the claimant was misusing or abusing the process of the court by seeking to raise the issue as to the basis on which the £100,000 was paid on the footing that there was a partnership. It is not enough simply to say that the issue could have been raised at the earlier stage, and that there are no special circumstances which justify permitting the issue (exceptionally) to be raised at the later stage.
35. There was no abuse in the present case. It is true that there was no order for the trial of a preliminary issue as to whether there was a partnership at all. But the hearing before Judge MacDuff QC was in fact restricted to this issue. Neither party addressed evidence or argument which was directed specifically to the question of the terms of the partnership. And despite the fact that there are passages in the judgment of Judge MacDuff QC in which he appears to be dealing with the basis on which the £110,000 was paid, I am satisfied that he did not in fact decide that issue. It would have been possible to include in the issues to be determined by the judge the question of the basis on which the £110,000 was paid, on the footing of partnership. The inclusion of that question would have presented the claimant with forensic difficulties, since her primary case was that there was no partnership at all. Be that as it may, it seems that neither party asked the court to take this course.
36. It was obvious that, if the court were to find that the relationship between the parties was one of partnership, and there were to be a taking of accounts, a number of issues might arise which, if not compromised, might necessitate a further hearing and evidence. These might have included the terms of the partnership itself. The question of what to include in the trial before Judge MacDuff QC was essentially a matter for case-management.
37. There is this further problem with the decision of Lloyd J. If the claimant ought to have raised before Judge MacDuff QC her contention as to the basis on which the payment was made, then so too ought the second defendant. Why should the claimant be the only party precluded on the taking of the accounts from raising her contention as to the basis on which the payment was made? If the judge is right, then surely the second defendant is in the same difficulty as the claimant. But if that were right, then one would reach the absurd situation that neither party would be allowed to put forward her contention as to the basis on which payment was made. In my view, this merely serves to underline that this was not a case of abuse of process at all.
38. For these reasons, as well as those given by Mummery LJ, I would allow this appeal.

Lady Justice Arden

39. I agree that HHJ MacDuff QC did not decide the terms on which the sum of £110,000 contributed by the appellant was to be treated in the partnership accounts of Ashworths Pharmacy. The importance of that issue in the winding up of the partnership is unlikely to have been appreciated at that stage. Accordingly this appeal must be allowed and the matter remitted to the Master to determine the issues set out in the judgment of Mummery LJ. Both parties agreed during the hearing of the appeal that, if the appeal was allowed, those were the issues to be remitted. There may well be other issues that need to be determined as well.
40. I further agree with the reasons set out in both the judgment of Mummery LJ and that of Dyson LJ. While it may be unusual to apply the principle in Henderson v Henderson in relation to separate stages of the same litigation, it is not conceptually impossible. The issue before HHJ MacDuff QC could, for instance, have required him to determine the proportions in which the partners were entitled to share in the surplus assets of the partnership. If the judge had been asked to determine that issue on the basis that the parties had agreed that the appellant's share of surplus assets should be that proportion which her contributions bore to the total value of the partnership assets and on the basis that her contributions for this purpose were part only of the sum of £110,000, it seems to me that the principle in Henderson v Henderson would be capable of being invoked if on the taking of the partnership accounts after judgment the claimant sought to argue that the balance of that sum ought also to be taken into account in determining her entitlement to surplus assets.
41. However, with hindsight at least, the issues before HHJ MacDuff QC should have been precisely defined. If they had been so defined, almost certainly the delay and costs that have been fruitlessly spent since his judgment in seeking to establish what was actually decided by him would have been avoided. That waste of time and costs is highly regrettable. In my judgment, the parties must now set their minds to co-operating with the court to ensure that these proceedings are brought to a swift, economical and just conclusion.
42. In future disputes as to the existence of a partnership, the parties and the trial judge should bear in mind the point which this appeal illustrates, namely the possibility that a dispute may arise on the taking of accounts as to what was decided by the court when dissolution was ordered. It may be impossible to foresee all the issues which ultimately arise in the taking of accounts, but the most practical way of avoiding the risk to which I have referred is likely to be case management of the dispute as to the existence of the partnership. At that stage the opportunity can be taken to debate the issues which the parties agree should be decided on that occasion.