ON APPEAL FROM THE HIGH COURT OF JUSTICE
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE AIKENS
LORD JUSTICE PATTEN
| FRANCESCA DRAKE
|- and -
|(1) JACK HARVEY (deceased))
(2) MARY ELIZABETH MAY HARVEY
(a protected party by Jacqueline Harvey, her litigation friend)
(3) CLARE HARVEY
(as co-executrix of the estate of Aidan Harvey)
(4) RICHARD JENKINS
(as co-executrix of the estate of Aidan Harvey)
The other respondents were not represented and did not appear
Hearing date : 6 April 2011
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lady Justice Arden
"(b) The "A" capital of the partnership (which the Partners intend shall relate to monies required on a long term basis for the establishment consolidation and extension of the partnership business) shall be the sum of Three hundred and sixty thousand Pounds (£360,000.00) and at the date hereof belongs to the Partners in the following shares:
"(c) Subject to the subsequent provisions of this Deed no Partner shall be entitled to withdraw all or any part of his "A" capital nor shall there be any increase in the amount of the "A" capital or any alteration in the respective shares of the Partners therein without the consent of all the Partners Provided that nothing in this Deed shall preclude the transfer by one Partner to another existing Partner of all or part of his share in the "A" capital."
"9. With effect from [1 May 1998] and until agreed otherwise by all the Partners the profits of the partnership shall belong to and shall continue to belong to the Partners in proportion to their holdings of "A" capital viz:-
Mr Harvey 12.5%
Mrs Harvey 12.5%
Excepting that Francesca's share of profits (excluding capital profits) shall not be less than such sums as may from time to time be agreed as her salary."
"13. (a) All necessary and proper books of account shall be kept by the firm and on [30 April] in each year a general account shall be taken of all the assets and liabilities and of the profits and losses of the partnership for the preceding year and shall be signed by each Partner.
(b) Such account when signed shall be conclusive and final between the Partners as to all matters stated therein unless some manifest error is discovered within three months of the signing hereof in which case such error shall be rectified."
"19. (a) In the event of a Partner retiring, dying, becoming bankrupt, becoming a patient under the Mental Health Act, the share of that Partner in the capital and assets of the partnership shall accrue to the surviving partners in the same proportions as their respective shares in the "A" capital for the time being and there shall be paid to the outgoing Partner his personal representative trustee in bankruptcy or receiver as the case may be a sum equal to:
(i) The amount standing to the credit of the outgoing Partner as his share in the capital of the partnership and as undrawn profits belonging to him in the last annual general account prior to his retirement, death, bankruptcy or becoming a patient as aforesaid; and
(ii) The amount of any further capital brought by him into and credited to him in the books of the partnership after the taking of the last annual general account or commencement of the partnership as the case may be; and
(iii) An amount equal to the outgoing Partner's share of profits of the partnership in respect of the period from the taking of the last general annual account or the commencement of the partnership or less an amount equal to the outgoing Partner's share of losses of the partnership in respect of that period as the case may be after allowing for all expenses in accordance with the partnership's usual accounting practices.
(b) The said sum shall be paid by six half-yearly instalments the first of such instalments to be paid six months after the retirement, death, bankruptcy or mental capacity of the outgoing Partner. Any part of the said sum not paid within such period of six months shall carry interest at Barclays Bank Plc base rate from time to time from the date of such retirement, death, bankruptcy or mental capacity until payment which interest shall be paid half-yearly in arrear on the same dates as the instalments are due."
"19 Variation by consent of terms of partnership
The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing."
Judgment of Mann J
" I agree that this case is of considerable assistance. Although the wording of the partnership deed in that case was not the same as in the present case, and although the account to be drawn in that case was to the accounting date next after the retirement, and not before, the principles it expounds are nonetheless applicable because the provisions and situations are sufficiently similar. The principles are:
(i) Where the partnership deed is silent as to the basis of valuation for the purposes of an account, the appropriate value is one which is fair.
(ii) Fairness can be determined by agreement between the parties. If they sign accounts for any given year on a particular valuation basis, that obviously makes it fair for that year.
(iii) A given basis can be enshrined and become binding if there is a consistent practice (usage) which demonstrates that the parties have actually agreed that as a consistent basis.
(iv) A consistent usage, leading to an agreement, for an account operating in one situation does not necessarily mean that there is an agreement operating in another. Thus a pattern of conduct operating on the basis of a continuing partnership does not necessarily bind an outgoing partner in relation to the accounts drawn for the purposes of his retirement (or death).
(v) A partner who sees his retirement coming or plans for it does not have to sign off on accounts prepared on a previously consistent basis if those accounts would not provide for a fair value of assets vis-à-vis him and his retirement (see Lord Wrenbury's example).
(vi) A fair account, in the case of a death or retirement, is likely to require real, and not historic, values to be attributed to the partnership property, absent factors pointing the other way and requiring otherwise."
" None of those authorities departs from the principles which I have extracted from Cruickshank; indeed they reinforce them. Applying those principles to the present case I find as follows:
(i) The partnership agreement is silent as to the basis of valuation for the purposes of drawing the accounts applicable to the death of Aidan and the retirements of the parents.
(ii) No accounts were agreed for the relevant year prior to Aidan's death (to 31 March 2006), or for any subsequent year relevant to the entitlement of the parents on their respective retirements.
(iii) The accounts to which the outgoing partners or their estates are entitled are accounts which reflect a fair value.
(iv) That fair value is the market value of the land (no other candidate other than the historic value has been proposed) unless there is an agreement otherwise, or unless there are other factors rendering such a value unfair. Historic valuations would be unfair because they are (for these purposes) unreal and do not reflect the real and full value of the outgoing partner's share.
(v) The fact that previous accounts contained historic values does not mean that the executors and parents are obliged to accept that for the accounts governing the payment out of Aidan's share. Those accounts were agreed on the apparent assumption of a continuing partnership. The death or retirement of a partner is a different circumstance requiring (or capable of requiring) a different valuation basis.
(vi) There is nothing in the partnership agreement which, as a matter of contract, requires the adoption of historic values.
(vii) The adoption of historic values has the potential to create considerable unfairness such that a clear case must be established for displacing that unfairness. The scope for unfairness is demonstrated by the facts of the present case. If historic values are applicable to all the departure events which have now left Francesca with the entirety of the partnership then she will have acquired the partnership at a very considerable undervalue indeed, mainly by dint of surviving (though I do not seek to minimise the actual work that she has done in the partnership)."
Is there a starting point, namely that the fair value basis should be adopted for the purposes of clause 1, unless otherwise agreed?
"It is not, I think, disputed- and if it were, I should be of the opinion that it could not be successfully disputed – that a full and general account of the property will be an account at which the property will be brought in at its true value. The articles are wholly silent on the principle to be adopted in preparing the full and general account of the property – and it remains simply that it must be a proper account of the property, whatever that is. " (page 137)
"the value of his share in the partnership calculated on the hypothesis that the partnership had broken up and its assets were sold on the date of his withdrawal at a price equal to the greater of (i) the liquidation value and (ii) the value based on a sale of the entire business as a going concern without the outgoing partner." (para 8.75)
"51 It is, I think, important to have in mind that the question in the present case is not (as it was in Cruikshank v Sutherland) "on what basis did the parties intend a post-event account to be taken, following a death or retirement?" The account on the basis of which the deceased partner's share in the capital of the partnership is to be ascertained, in the present case, is a pre-event account. Nor is the relevant question "at what value is the Brantwood Road property to be taken for the purpose of ascertaining the deceased partner's share?" That question is answered by clause 20 of the partnership deed; the value is the figure appearing in the partnership accounts. The relevant question in the present case is "what did the partners intend the expression 'a just valuation' to mean in relation to the Brantwood Road property?" That question arises in the context of the preparation of a general account under clause 15. The answer cannot depend on whether or not the general account turns out to be relevant for the purpose of ascertaining the share in the capital of the partnership of a partner who happens to die in the course of the year following the date of the account. The answer must be the same whenever the general account is taken. So, in the present case, the usage or course of dealing in relation to the general accounts which were prepared year by year does provide a relevant context in which to determine the question "what did the partners intend the expression 'a just valuation' to mean in relation to the Brantwood Road property". Further, of course, in the present case the general account for 30 March 1950 was used as the basis for the payment out of Mr Bernard White's estate; and the general account for 30 March 1961 was used in connection with Mrs Jessie Turner's retirement."
"67 For my part, I doubt whether it is correct to approach the construction of a partnership agreement—or any other document—on the basis that the court leans towards one conclusion rather than another. The correct approach, as it seems to me, is to seek to ascertain what the parties intended by the words which they actually used, having proper regard to the circumstances in which they made their agreement. Those circumstances will include the obvious fact that, as they must be taken to have appreciated, valuation of the share of a retiring or deceased partner on the basis that assets are taken at historic cost is likely (with past experience of inflation in mind) to lead to the result that the retiring or deceased partner receives less for his share than he would do if the assets were taken at current market value. The question, in any particular case, is whether that is a result which they must be taken to have intended. As the judge himself pointed out, at pp 2089-2090, it was not unusual in a family partnership to find provisions designed to ensure that the business passed from one generation."
"47 Thus far, as it seems to me, the decision is that, as a matter of construction of the articles of partnership with which the House of Lords was concerned on that appeal, the requirement that a "full and general account" be taken was met by bringing assets in at a "fair value". But, as Lord Wrenbury pointed out, the articles were "wholly silent as to the principle to be adopted". In particular, there was nothing in those articles comparable to clause 20 of the 1949 deed in the present case.
48 Lord Wrenbury then went on to consider whether there was any usage or course of dealing "such as that an inference is to be drawn that on the death of a partner his share is to be paid out on the footing of book values?" He answered that question in the negative. He said, at p 138:
"How could there be a practice and usage uniform and without variation to pay a deceased partner's share on the footing of book values and not of fair values, where no partner had died before and no partner had retired before? The only practice which existed—and that only on two occasions, namely, in April 1915 and April 1916—was to prepare the account—when the interest of all the partners was the same—on the footing of book values. When a partner died or retired, the interests of all parties were not the same. The executors of a deceased partner were, so to say, vendors whose interest it was to put the highest sustainable value on the assets—the continuing partners were, so to say, purchasers whose interest was the reverse. Where was the practice and usage evidencing a new agreement outside the written articles to found a right to buy out the deceased partner on the terms which were best for the purchasers? … The fact is, that in this partnership an account has never been stated with a view to fitting the case of a retiring partner, or a deceased partner, or a senior partner who is going to exercise an option of taking over all the assets. The partners have never had any such event in view in making the account which they have made. There has never been an account prepared which was intended to meet all the various contingencies of events such as these."
49 It will be apparent from the views which I have already expressed that I do not regard the present as a case in which it is necessary to rely on usage or course of dealing as a foundation for an inference that the partners reached a new agreement, or varied an existing agreement by consent. In the present case, the relevant agreement was made on 28 July 1961. The usage or course of dealing prior to that date does not alter or vary the agreement then made. Rather, it provides a context in which to construe the agreement then made. To take account of the usage or course of dealing prior to the date of the agreement is simply to apply the ordinary principles of construction to the task of ascertaining what the parties meant by the words which they used.
50 Nevertheless, the observations of Lord Wrenbury—although directed to a rather different question—are pertinent to the present case. The usage or course of dealing prior to the date of the relevant agreement provides a context in which to construe that agreement only to the extent that it assists in providing the answer to the question "what did the parties mean by the words which they used". If the pre-contract events have no relevance to the circumstances in relation to which that question has to be answered, they are unlikely to provide assistance."
What method of valuation of the farmland is to apply to the valuation of a share under clause 19?
Could Aidan's executors insist on a revaluation for the purposes of the general accounts or for the purposes of the accounts for the broken period?
Did the partners agree subsequently to the execution of the partnership deed that the basis of valuing a share on death should be fair value?
Lord Justice Aikens
Principles of construction of the partnership deed
Construction of the partnership deed
"…will include the obvious fact that, as they must be taken to have appreciated, valuation of the share of a retiring or deceased partner on the basis that assets are taken at historic cost is likely (with past experience of inflation in mind) to lean to the result that the retiring or deceased partner receives less for his share than he would do if the assets were taken at current market value".
Lord Justice Patten :