England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
(HIS HONOUR JUDGE NORRIS
Sitting as a Deputy Judge of the High Court)

		Royal Courts of Justice Strand London, WC2
		Wednesday, 15 June 2005

1. MASTER OF THE ROLLS:

Introduction

This is an ill-advised piece of satellite litigation. It raises nonetheless a point of procedure of some importance on which there appears to be no authority. The claimants and the defendant entered into a partnership agreement which contains an arbitration clause in the following terms:

"Arbitration

If it any time any dispute or question shall arise between the partners (including any Outgoing Partner) about the Partnership or its accounts or transactions or its dissolution or arising out of or in connection with this Deed or its validity construction or performance then the same shall be referred to an arbitrator to be nominated on the request of any Partner by the President for the time being of the Chartered Institute of Arbitrators and according to the provisions of the Arbitration Acts 1950 and 1979 and the decision of the arbitrator (including a decision that the Partnership shall be dissolved) shall be final and binding on all the Partners and any Outgoing Partner."

The terms of that clause suggest to me that it is taken from a standard form of some antiquity.

2. The claimants commenced an action raising issues which fell within the ambit of that clause. The defendant did not seek to stay the action. He responded by filing a defence and took other steps in the action. The claimants then applied to amend their particulars of claim to raise additional issues closely related to those that were already the subject of the action. The defendant objected that these should be referred to arbitration. What approach should the court adopt in such circumstances? That is the question raised by this appeal. The judge - His Honour Judge Norris QC, sitting as a judge of the Chancery Division - gave the claimants permission to amend without prejudice to an application by the defendant to stay the new issues raised pursuant to section 9 of the Arbitration Act 1996. The defendant made such application. In a careful judgment, delivered on 31 January 2005, the judge refused the application but gave the defendant permission to appeal. This is the defendant's appeal against that judgment.

The facts

3. In June 2002 the claimants and the defendant began to run, as a joint venture, a restaurant in Kidderminster called Sizzler Spice. The first claimant, Mr Ahad, was the chef. The second claimant, Mr Ahmed, who had his own grocery business in West Bromwich, provided the supplies. The defendant, Mr Uddin, acted as manager. He saw to acquiring premises at 47 The High Street, Kinver, with the help of a loan secured by a mortgage. On 1 May 2003 the three entered into a written partnership agreement. The claimants allege that this gave formal effect to a partnership that had existed from the outset. It is the defendant's case that the partnership did not begin until 1 May upon each of the claimants investing in it the sum of £26,666.66.
4. The conclusion of the written partnership agreement coincided with a breakdown in the relationship between the claimants and the defendant. On 12 May 2004 Mr Ahad received a letter written by Cromwell, dated previous day, who were solicitors acting on behalf of Mr Uddin, purporting to be a formal notice of termination of the partnership. On 2 June the claimants began proceedings against the defendant in the Birmingham District Registry. The Particulars of Claim alleged that the defendant had committed numerous breaches of the partnership deed, by reason of which the claimants had suffered loss and damage. Paragraph 4 (f) of the pleading was in the following terms:

"In breach of clause 18 the defendant has never called a meeting of the partners to deal with the affairs of the partnership. In particular, by letter dated 12 May 2004 he instructed his solicitor to terminate the first claimant's status as a partner (without calling a meeting or adhering to the expulsion procedure set out in clause 20) and he thereby prohibited the first claimant from attending at the premises. The claimants contend that this attempt to expel the first claimant was ineffective and did not dissolve the partnership."

Paragraph 6 of the pleading was in the following terms:

"In the first place the claimants intend to invoke the provisions of the partnership deed to expel the defendant from the partnership; the claimants reserve fully their rights to dissolve the partnership and to seek an order that the affairs of the partnership be wound up."

5. The relief claimed was as follows:

"1 An order that the defendant be restrained by injunction until judgment or further order from doing whether by himself or by his servants or agents any of the following acts or any of them that is to say excluding the claimants from any part of the premises and having full access to the partnership books of account letters or other documents and attempting to exclude the claimants from carrying out with the defendant the control and management of the partnership business.

2 An order that the defendant be restrained by injunction until judgment or further order from whether by himself or by his servants or agents selling disposing dissipating charging parting with possession or in any other way dealing with the assets of the partnership including the premises save in the ordinary course of business.

3 An order that until judgment expulsion of the defendant or further order in the meantime the defendant shall provide such information and explanation as the claimants by their solicitor may reasonably require concerning the conduct and affairs of the partnership including (but without limitation) all books accounts and records of a financial nature relating to the business.

4 All necessary accounts be taken and inquiries be taken and made.

5 Damages for breach of contract/an indemnity against the defendant pursuant to clause 7.2 of the partnership deed.

6 Such further or other relief as may be just."

6. An application was made for interim relief, which included the provision of partnership accounts and an injunction against disposing of the partnership assets. Mr Ahad filed a lengthy statement in support of that application. He complained that Mr Uddin had acted in a high handed manner, exercising total control over the running of the partnership business, refusing to provide the claimants with any accounts but paying them £100 a week as a "wage" and seeking to mortgage the restaurant premises to the Hong Kong and Shanghai Bank. Mr Ahad referred to the letter from Mr Uddin that he had received on 12 May 2004. He stated:

"We do not regard Cromwell's letter as a valid notice dissolving the partnership. It is our intention to continue the business but we can no longer continue to be in partnership with Mr Uddin. We intend to invoke the procedures set out in the partnership agreement to exclude him lawfully whereupon we will exercise the option in the agreement to purchase his share of the business."

7. Her Honour Judge Alton granted the relief sought. On 10 June 2004 a consent order was made continuing the interim relief, providing for service of a defence by 7 July and for a case management conference on the first available date after 10 September. A defence was served on 10 July. It denied each of the allegations of breach of the partnership and alleged that the claimants had agreed to raising money on the security of the restaurant premises to meet partnership debts. It alleged that the partners had agreed that Mr Uddin and Mr Ahad would receive £100 per week each and that Mr Ahmed would receive nothing as he worked in his own business.
8. Paragraph 6 (f) included the following plea:

" ..... It is admitted that by a letter dated 12 May 2004, the defendant sought to and did terminate the first claimant's status as partner pursuant to clause 21 of the partnership deed. Insofar as the same was not effective, the defendant will seek to invoke the procedures for termination under clause 21. It is admitted that there was no dissolution of the partnership by the letter of 12 May 2004."

Paragraph 8 pleaded as follows:

"It is denied that the claimants are entitled to invoke the expulsion procedures pursuant to clause 20, or otherwise as alleged in paragraph 6 of the particulars of claim. The further reservation of rights in respect of dissolution is noted, without admission of the same."

It was denied that the claimants were entitled to the relief claimed or any relief.

9. On 11 August the claimants served on the defendant a notice of a resolution that he be expelled from the partnership in accordance with its terms. The notice stated that the meeting at which this resolution would be considered would take place at Birmingham District Registry on 13 September. This was the date fixed for the case management conference. The defendant then served on the claimants a notice dated 23 August 2004 purporting to dissolve the partnership. On 9 September 2004 the defendant's solicitors served on the claimants a notice calling on them to concur in the appointment of an arbitrator in accordance with the arbitration clause in the partnership agreement. The notice stated that the arbitrator would be asked for a declaration that the partnership had been dissolved or that it should be dissolved and that the partnership business should be administered in accordance with the Partnership Act 1890 pending winding up of the business.
10. The case management conference on 13 September was attended by the claimants with counsel and by a solicitor for the defendant. The judge varied the order in relation to the preparation of accounts in a way which was plainly intended to reflect the different dates upon which the partnership might have commenced, come to an end or changed in composition. Thus an account was ordered in respect of each of the following periods:

(i) the period between 1 June 2002 and 1 May 2003, thus representing the difference between the parties as to the date on which the partnership began;

(ii) the period between 1 May 2003 and 11 May 2004, thus reflecting the issue as to the effect of the letter from Cromwell; and

(iii) the period between 11 May 2004 and 13 September 2005 (sic), thus, as I infer, reflecting the date upon which the claimants have stated that they were going to expel the defendant.

The case management conference was then adjourned to allow more time for the preparation of these accounts. The defendant did not attend and immediately after the conference the claimants in his absence resolved that he be expelled from the partnership.

11. On 19 November the defendant's solicitors served on the claimants a further notice to concur in the appointment of an arbitrator. This stated that, in addition to the relief sought in the previous notice, the arbitrator would be asked to declare that the purported expulsion of Mr Uddin from the partnership was invalid.
12. On 10 January 2005 the claimants sought and were granted permission to amend their particulars of claim. The amendment recited the claimants' purported expulsion of the defendant and the defendant's purported dissolution of the partnership and sought declarations that the defendant's purported expulsion of Mr Ahad by the letter received on 12 May 2004 was of no effect, that the defendant's purported dissolution of the partnership by letter of 23 August 2004 was of no effect and that the defendant was validly expelled from the partnership on 13 September 2004.
13. By the same order that gave permission to amend the particulars of claim the judge ordered that the defendant should lodge an application for a stay pursuant to Section 9 of the 1996 Act. This the defendant did, seeking a stay of the proceedings "insofar as they relate to the amended particulars of claim".

Section 9

14. Section 9 of the 1996 Act provides:

"(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

(2) An application may be made notwithstanding that the matter is to be referred to arbitration only after the exhaustion of other dispute resolution procedures.

(3) An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim.

(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed."

The judgment

15. Before the judge the issue appears to have crystallised into the question of whether the amendments to the particulars of claim raised a different "substantive claim" to that made in the original particulars of claim. It was common ground that the defendant was precluded by Section 9 (3) from seeking a stay of the original claim, because he had taken a step to answer the "substantive claim" in those proceedings. The judge's conclusion was as follows:

"The substantive claim in the instant case is that the defendant has broken the partnership agreement, an allegation each of which he denies, and which must be determined in the court proceedings. It is that which founds the claimants' assertion that they are entitled to expel him. It is that which founds their claim for accounting relief in the proceedings before the court. It is that which would have to be determined in any arbitration. The only wholly new issue introduced into the proceedings by the amended particulars of claim is the dissolution notice served by the defendant himself.

Reviewing the issue, that will have to be decided by the court in the existing proceedings and the issues that would have to be decided in relation to the purely new claims by an arbitrator is (sic) isolated. I am in no doubt that there is such a degree of overlap between the two that the old original claim and the newly amended claims are substantially the same. The defendant has chosen in his defence to address each of the allegations of breach against him which the claimants say underlies their expulsion claim. He has denied their right to expel him. Those are issues of which the court is already seised. The amended claims do not, in my judgment, add anything significant. In those circumstances I will refuse to grant a stay.

Submissions before us

16. When Mr McGuire rose to open the appeal on behalf of Mr Uddin we asked him to explain the object of the application for a stay. He said that Mr Uddin wished to have his dirty linen washed in private. It is not easy to see how the limited stay sought would achieve this objective. The allegations of Mr Uddin's breaches of the partnership agreement are fairly and squarely before the court. The stay sought relates simply to the question of the effect of the defendant's purported expulsion of Mr Ahad from the partnership and purported dissolution of the partnership and the claimants' purported expulsion of the defendant. Insofar as these questions turn on allegations of misconduct by Mr Uddin, those are matters before the court. I have some difficulty in seeing that this not inexpensive procedural exercise has any real point to it. That, however, is of no relevance, as Mr McGuire observed, if Mr Uddin is entitled in law to his stay.
17. Mr McGuire submitted that he was so entitled. The matters raised by the amendments were largely new issues. The declaration sought in relation to the effect of the 11 May letter had been raised in the original particulars of claim. The declaration sought in relation to events on 23 August and 13 September were demonstrably novel in that those events post-dated the issue of the particulars of claim. It could not be suggested that Mr Uddin had taken any step by way of answer to those substantive claims. He was entitled as of right to a stay by virtue of Section 9 (3) of the 1996 Act.
18. Mr Taylor for the claimants submitted that this was not the right way to look at the position. The court should look at the substance of the matter raised by the original proceedings and consider whether the amendments fell within this. Any matter that it was necessary to decide to resolve the original proceedings necessarily fell within the subject matter of those proceedings. The proceedings were about a partnership which had ended or, as was common ground, was going to be ended. The exercise upon which the court had embarked with the consent of the defendant, and in particular the preparation of accounts, necessarily involved deciding the issues of whether the partnership had ended that were raised by the amended pleading.

Conclusions

19. It does not seem to me that the correct procedure has been followed in this case. Section 9 does not expressly address the position where particulars of claim are amended after the defendant has taken a step to address the substantive claim made in those particulars. Permission to amend in such circumstances is required and, so it seems to me, the appropriate course is for the defendant, if he contends that the amendment sought will introduce new issues which he is entitled to have resolved by arbitration, to object on this ground to permission being given to amend. But nothing turns on this point, for permission to amend was granted without prejudice to the application to stay. The simple issue is, so it seems to me, whether the matters introduced by amendment were part and parcel of the dispute of which the court was already seised, or whether they were discrete matters in respect of which Section 9 entitled the defendant to insist that they be arbitrated.
20. The original particulars of claim and defence raised issues of whether the defendant had breached the partnership agreement. They raised issues of whether he had validly expelled Mr Ahad from the partnership. The claimants stated that they intended to invoke the provisions of the partnership agreement to expel the defendant from the partnership and that they reserved their rights to dissolve the partnership. The defendant denied that the claimants were entitled to invoke the expulsion procedures under the partnership agreement and stated that he would seek to invoke the procedures for termination under that agreement. Each then purported to exercise the right that each had pleaded was available. At the case management conference the judge directed that the accounts that were to be prepared should reflect the conflicting contentions of the parties as to these rights.
21. In these circumstances I have reached the following conclusion. The substance of the dispute before the judge was as to the partnership accounts, the partnership assets and the right to make use of the latter. Insofar as these issues turned on rights of termination of the partnership, and whether such rights had been exercised, those issues would fall to be determined by the judge. In short, the matters raised by the amendment were in respect of the matter raised by the original proceedings in relation to the substance of which the defendant had taken a number of steps in the proceedings.
22. My conclusion can be tested in this way. Assume that there had been no arbitration clause and the claimants had sought to raise the amendment issues by commencing proceedings before a different court. Mr McGuire accepted that there would be likely to be an order for the proceedings to be consolidated, but said that this would simply be a matter of case management. I do not agree. I consider that it would have been vexatious for the claimants to have sought to pursue those issues in separate proceedings and an infringement of the principle in Henderson v Henderson [1843] 3 Hare 100. The issues raised by the amendment belong in the action.
23. For these reasons I would dismiss this appeal.
24. LORD JUSTICE WALLER: I agree.
25. LORD JUSTICE LLOYD: I also agree.

Order: Appeal dismissed with the costs summarily assessed at £3,600 plus VAT to be paid within 28 days