IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
MANCHESTER DISTRICT REGISTRY
HIS HONOUR JUDGE HOWARTH
[Lower Court No. 4MA90205]
B e f o r e :
LORD JUSTICE WILSON
LORD JUSTICE HUGHES
|M. YOUNG LEGAL ASSOCIATES LTD (CLAIMANT/FIRST RESPONDENT)|
|- v -|
|ZAHID (A Firm) (FIRST DEFENDANT/SECOND RESPONDENT)|
|SAMEERA SHARIF (SECOND DEFENDANT/THIRD RESPONDENT)|
|JAMAIL AKHTAR SHARIF(THIRD DEFENDANT/FOURTH RESPONDENT)|
|ZAHID BASHIR(FOURTH DEFENDANT/FIFTH RESPONDENT)|
|ROBERT HEYWOOD OGDEN LEES (FIFTH DEFENDANT/APPELLANT)|
Smith Bernal Wordwave Limited
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MR A MCGEE (instructed by Messrs Pearson Hinchcliffe, Albion House, 31 Queen Street, Oldham, OL1 1RD) appeared for the First Respondent.
The Second Respondent did not appear.
The Third and Fourth Respondents appeared in person by the Fourth Respondent.
The Fifth Respondent appeared in person.
Crown Copyright ©
(a) the firm Zahid itself; but in February 2004 it was dissolved and so it takes no part in the action;
(b) Mrs Sharif; she was a partner in the firm from 1 November 2002 until its dissolution;
(c) her husband, Mr Sharif; in that he was at no time other than a legal executive in the firm, there is an issue, as yet unresolved, as to whether the claimant has any cause of action against him;
(d) Mr Bashir; he was a partner in the firm from the date when it began to practise, namely 4 March 2002, until 1 September 2003; and
(e) Mr Lees; it is in relation to his status in the firm that the preliminary issue arose.
"1. Everyone who represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm, is liable as a partner to anyone who has on the faith of any such representation given credit to the firm "
The claimant presented to the judge an alternative argument that, even were he not to have been a partner in the firm, Mr Lees had held himself out as being a partner of it within the meaning of section 14 and so was liable to the claimant for the indebtedness of the firm incurred under the contract. But the judge rejected the alternative argument: he held that the claimant had failed to establish that its giving credit to the firm had been on the faith of the representations which had on any view been made by Mr Lees to the effect that he was a partner. The claimant does not cross-appeal against that conclusion; thus there is no escape from the need to consider whether the judge was both correct in law and entitled on the facts to conclude that Mr Lees was a partner in the firm.
"Partnership is the relationship which subsists between persons carrying on a business in common with a view of profit."
Section 2, supplementary to section 1, provides as follows:
"In determining whether a partnership does or does not exist, regard shall be had to the following rules:
(3) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business; "
"Every practice must have at least one principal who is a solicitor qualified to supervise."
The words "qualified to supervise" are italicised in the paragraph because they are defined in one of the notes to the rule, namely note (d), as follows:
"A solicitor is qualified to supervise if he or she:
(i). has held practising certificates for at least 36 months within the last ten years; "
Mr Bashir had held practising certificates only for about 24 months.
"[Mr Bashir and Mrs Sharif] asked whether I would be prepared to join the practice so that they could satisfy the Law Society Regulations. Following a number of meetings and discussions between myself, [Mr] Bashir and [Mr] Sharif, I agreed to do so." (emphasis supplied)
In his oral evidence Mr Lees' words were that Mr Bashir approached him:
"to satisfy the Law Society's requirement for somebody to be a partner until he had satisfied the three years post-qualification time." (emphasis supplied)
So the initial arrangement was that, when in about November 2002 Mr Bashir would become qualified to supervise, the association of Mr Lees with the proposed firm would cease.
"I wanted an indemnity from any bank overdraft and an assurance that I would get an indemnity from the people running the practice for any debts. I didn't get it in writing. I wish I had done now otherwise I would have been able to show you. But I can assure you I was told that I would not be responsible for any of the firm's debts."
In a later answer to Mr McGee Mr Lees repeated that Mr Bashir had assured him that he would not be "responsible for" the debts and that he would be "indemnified against" the debts; and he added that in his view both phrases had the same meaning.
"There is no suggestion in any of the evidence that either of these gentlemen was seeking in any way to deceive the Law Society.
It seems to me that what at that time Mr Bashir and Mr Lees were agreeing was to come together in such a relationship as would entitle the firm to practise, in other words to practise in accordance with [rule 13 of the Rules of 1990]. Mr Lees says, and I think on the whole I accept, that he said to Mr Bashir that he was not going to be liable for the debts of the practice and that he should, whatever the situation was, clear matters with the Law Society so that they could practise properly as solicitors. Neither of them desired to circumvent what the Law Society required."
Thus on 4 March 2002 the firm was set up and began to practise. As Mr Lees was well aware, the firm's writing-paper initially indicated that there were two partners, namely Mr Bashir and Mr Lees.
"The background to my involvement with the Firm is that I was approached by Mr Bashir and Mr Sharif, whose wife was in the process of qualifying as a Solicitor, to be a Partner in a new firm they intended to start named "Zahid". I was not to have an active role in the firm but to help and advise as to the running of the firm and to be there on a regular basis in order to satisfy the Law Society's requirements as Mr Bashir had not been qualified for 3 yrs." (emphasis supplied)
Apparently in answer to a letter, Mr Lees added:
"10. In view of my earlier remarks I would not say the Partnership was a Sham up to Nov 2003."
"13. Those remarks are remarks which he made far more contemporaneously than anything that has been said in relation to these proceedings. It seems to me that they have a considerable significance. I take the view that what was entered into and agreed between Mr. Bashir and Mr. Lees was that they would enter into such a relationship as they then understood was required by the Law Society under rule  involving perhaps less supervision than the Law Society would ideally want from Mr. Lees but, nonetheless, entering into what was a true partnership. In that regard there is only Mr. Lees' evidence and the documents I have before me as to what the nature of that initial agreement was. I accept that the evidence as set out in Mr. Lees' witness statement skirts round the question of whether there was a partnership or no.
14. Whether there was a partnership or no may, in fact, depend to a considerable extent on the provisions of the Partnership Act 1890, and on the question of whether or no this was a relationship between two people carrying on business in common with a view of profit. That is section 1(1) of the Partnership Act 1890. A simple test, factually not necessarily simple at all. I accept also that whatever label the parties chose to describe themselves by on their own notepaper is not determinative. You look at the reality, you do not look at the form or the window dressing.
16. At the end of the day a firm was set up and, in my judgment, it was set up as a firm between Mr. Bashir and Mr. Lees on the basis that they would do what they understood was required of them to set up such a firm by the Law Society, i.e. that Mr. Lees would be a partner in accordance with rule . It seems to me that I can derive comfort from Mr. Lees' response to the forensic investigation report where he says that he was approached by Mr. Bashir and Mr Sharif to be a partner in a new firm, and he accepted that approach, that offer, and that is what happened.
22. If that was the agreement between Mr. Bashir and Mr. Lees, when Mrs. Sharif came in as partner, as she undoubtedly did towards the end of 2002, she came in and joined a firm as it was then set up. In other words, it seems to me that the people who were partners in the two man firm became two of the partners in a three person firm Thus, the answer to the question I am asked to answer is: yes, there was a partnership."
"There is no partnership, unless there is an agreement that the party shall have immediate participation in the profits."
Then, in Pooley v Driver (1876) 5 Ch D 458, Jessel MR referred (at 472) to "a business bringing profit and dividing the profit in some shape or other between the partners"; and with emphasis he added "That certainly partnership is". Later, in Walker v Hirsch (1884) 27 Ch D 460, this court held that an agreement for participation in profits, although prima facie evidence of partnership, was not conclusive and that other features of the agreement demonstrated that instead it created a relationship of master and servant.
"An agreement that something shall be attempted with a view to gain, and that the gain shall be shared by the parties to the agreement, is the grand characteristic of every partnership "
Then he cited 18 definitions of a partnership, taken from what he called "works of celebrity" including (at 3) that of Sir Frederick Pollock in his Digest of the Law of Partnership that:
"Partnership is the relation which subsists between persons who have agreed to share the profits of a business carried on by all or any of them on behalf of all them."
"Hitherto, it has been considered essential for a partnership to have for its object not only the acquisition, but also the division, in some way or another, of profit and consequently mutual insurance societies have not hitherto been treated as partnerships. Such societies are, however, associations "which have for their object gain" It may therefore be that societies of this nature will be held to be partnerships under this Act."
Later editions of Lord Lindley's book adhered to this suggestion and expanded upon it.
"But the Act, while it speaks of "a view of profit", says nothing about the profits being shared between the partners at all; and it has accordingly been suggested that under the Act persons who jointly carry on a business resulting in profit, though without any intention of dividing that profit among themselves, or giving any one of them the right to claim a share, are partners, and even that this was always the law, and the division of profits, notwithstanding the uniform language of judges and text-writers, is "rather an accident than of the essence of the partnership relation". This opinion is certainly novel, and I am unable, with great respect for the present learned editors of Lindley on Partnership, to see any sufficient reason for accepting it."
But in the 15th and last edition of Pollock's Digest, published in 1952 and edited by Professor Gower, Sir Frederick's protest was watered down. The opinion in Lindley was said only to be open to objection. And then, almost inconsistently, the following was insinuated into the text (at 11):
"On the other hand, it is thought that a salaried partner is a true partner notwithstanding that he is paid a fixed salary irrespective of profits and that as between himself and his co-partner he is not liable for the partnership debts."
Whether the authorities cited for that proposition truly supported it is a hare which I will not attempt to chase.
"The rules of equity and of common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act ."
The editor concludes (at 34) that:
"The wording of the statutory definition does not seem to be sufficiently unambiguous to make it clearly inconsistent with the common law and therefore it seems it is still essential for a partner to participate to some extent in the profits."
(a) First, Blackpool Marton Rotary Club v Martin  STC 823. The inspector issued an assessment to tax against the Rotary Club which was invalid if, as it contended on appeal to Hoffmann J as he then was, the club was a partnership. Among its other activities the club organised modest fund-raising events. In dismissing the club's appeal the judge said (at 830 j):
"[The argument of the club] seems to me to involve a misconception about what the Partnership Act means when it speaks of "carrying on a business with a view of profit". It means, in my judgment, with a view to a profit to which the partners will in some proportion or other each be individually entitled In the case of a club the position is quite different."
But I agree with Mr McGee that it is impossible to consider that, in pursuing their fund-raising activities, the Rotarians were even "carrying on a business" within the statutory definition.
(b) Second, Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd (1996) SLT 186. A sublessee alleged that the nature of the arrangement between it and the headlessee referable to development land in Cumbernauld was such as to make them partners in relation to its proposed development. The Act of 1890 applies in Scotland. The Lord Ordinary, Lord Coulsfield, rejected the allegation. He said (at 195 F J):
" it is undoubtedly true that there is no one provision or feature which can be said to be absolutely necessary to the existence of a partnership, so that the absence of that feature inevitably negates the existence of a partnership Nevertheless it seems to me that a sharing of profits and losses and mutual agency are typical of partnerships, and delectus personae [viz., the limited rights of assignees] may be said to be a further such feature. The absence of one or even more than one of these features might be reconcilable with the existence of a partnership. In the present case, however, it seems to me that none of them are present. That is a situation which I find irreconcilable with the existence of a partnership "
It is obvious that such words are a wholly insufficient foundation for Mr Blackett-Ord's submission. I am not even persuaded that the Lord Ordinary was suggesting that absence of the three features would always negative partnership (for why should that be?) rather than that such was its effect in that case.
(c) Third, Memec plc v. Inland Revenue Commissioners  STC 754. This court had to analyse for tax purposes the nature of a so-called silent partnership between a company and its subsidiary. Peter Gibson LJ set out (at 764 ef) five "relevant characteristics of an English partnership". The fifth was that "the partners own the business, having a beneficial interest, in the form of an undivided share in the partnership assets including any profits of the business." The proposition is uncontroversial for on any view participation in profits is a characteristic of a partnership. The question, not raised in the Memec case, is whether it is a pre-requisite.
"It seems to me impossible to say that as a matter of law a salaried partner is or is not necessarily a partner in the true sense. He may or may not be a partner, depending on the facts. What must be done, I think, is to look at the substance of the relationship between the parties; and there is ample authority for saying that the question whether or not there is a partnership depends on what the true relationship is, and not on any mere label attached to that relationship. A relationship that is plainly not a partnership is no more made into a partnership by calling it one than a relationship which is plainly a partnership is prevented from being one by a clause negativing partnership: see, for example, Lindley on Partnership, 13th ed. (1971), p. 66.
If, then, there is a plain contract of master and servant, and the only qualification of that relationship is that the servant is being held out as being a partner, the name "salaried partner" seems perfectly apt for him; and yet he will be no partner in relation to the members of the firm. At the other extreme, there may be a full partnership deed under which all the partners save one take a share of the profits, with that one being paid a fixed salary not dependent on profits. Again, "salaried partner" seems to me an apt description of that one: yet I do not see why he should not be a true partner, at all events if he is entitled to share in the profits on a winding up, thereby satisfying the point made on section 39 by Lindley at p. 13. However, I do not think it could be said it would be impossible to exclude or vary section 39 by the terms of the partnership agreement, or even by subsequent variation (see section 19), and so I think that there could well be cases in which a salaried partner will be a true partner even though he would not benefit from section 39. It may be that most salaried partners are persons whose only title to partnership is that they are held out as being partners; but even if "salaried partners" who are true partners, though at a salary, are in a minority, that does not mean that they are non-existent."
The judge proceeded to hold that the parties had been in partnership.
"The phrase 'salaried partner' should be avoided because it has no single meaning and its use creates confusion.
The expression 'salaried partner' is used loosely to describe a person who is less than a full profit-sharing or 'equity' partner because he is one or other of the following:
(a) An employee who is not a partner but who is described as a partner to enhance his own status or that of the firm
(b) A true partner who receives all or most of his remuneration in the form of a salary rather than a simple share of profits.
Whether he is a true partner will be decided according to whether his agreement with the firm leans towards an agreement for partnership rather than an employment agreement, and whether his relationship with the firm satisfies the other requirements of partnership The mere fact that he is called an 'equity' partner or 'salaried' partner is not of itself decisive, although the usual modern meaning of the latter term is in the first of the two senses given above."
(a) an agreement that a person should receive a share of profits, however nominal that share might be, could make him a partner and indeed was prima facie evidence thereof (section 2(3)); and
(b) an agreement that a person should receive a share of profits limited to payments in a fixed sum could make him a partner (In Re Hill  1 Ch 623); but
(c) an agreement that a person should receive payments in a fixed sum, irrespective of profits, precluded his being a partner.
Order: Appeal dismissed.