England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON CIVIL JUSTICE CENTRE
HHJ COWELL
Claim No OCL10607

		Royal Courts of Justice Strand, London, WC2A 2LL
		30/03/2012

Lord Justice Mummery:

The appeal

1. The main issues arising from the pleadings in this case at trial were (a) whether, for a period of a few months in the summer of 2008, the parties became partners at will in a restaurant business started up by the defendant in Walthamstow under the name "Tropical Taste" and, possibly, in her other restaurant business at Natalie's Café in Manor Park, and (b) whether the defendant made actionable misrepresentations to the claimant in May 2008, thereby inducing him to enter into a business partnership with her and to pay her sums totalling £80,000, restitution of which was sought.
2. The issue on this appeal is whether HHJ Cowell's order dated 22 June 2011 was wrong. He ordered Mrs Natalia Valencia, the defendant, who appeared in person before him with pro bono legal support from a solicitor, to repay to Mr Llupar, the claimant, the sum of £80,000, together with interest and costs. He also made an order that the defendant's beneficial interest in a property stand charged by way of an interim charging order with the sum of £124, 480.55.
3. On 5 October 2011 Aikens LJ granted the defendant permission to appeal on all four grounds advanced. The two main grounds relied on at the hearing were that the judge was wrong (a) to reject the defendant's case that the parties became partners at will and (b) to find that she had induced the claimant by two misrepresentations to enter into partnership with her and to make the payments totalling £80,000 received by the defendant in May and June 2008.
4. I should note at this early stage that, when finding the facts on which he based his conclusions on both areas of dispute, the judge said that he preferred the evidence of the claimant to that of the defendant. The judge said that he regarded the claimant "as a man who gave his evidence honestly", while he regarded the defendant's evidence as unreliable. Those findings are acknowledged by Ms Start, who appears pro bono for the defendant, though she asked this court to consider the expressed basis for the judge's preference and the evidence relied on in the judgment.
5. The defendant seeks permission to appeal on a further ground that the claimant acted in repudiatory breach of contract and/or in breach of his fiduciary duties. It is accepted, however, that, if the defendant fails on the partnership point, no separate breach of contract or breach of duty points arise.

Background

6. The defendant, who, like the claimant, is from the Philippines, and was a friend of the claimant's daughter, was the owner and manager of two restaurants in North London. One of them was Natalie's Café at 144 Church Street, Manor Park, London E12 with living accommodation above. The other restaurant of the "all you can eat" type of buffet called "Tropical Taste" was at 29-31 High Street, Walthamstow, London E17.
7. It is common ground that the claimant made four payments to the defendant: three of them were by cheque between 29 May and 8 June for £5,000, £62,000 and £10,000 respectively, and £3,000 was paid in cash on 2 June. The claimant had money available from the proceeds of sale of his burger bar in Wimbledon.
8. The core dispute concerns the basis on which the payments were made and received.
9. According to the claimant, the defendant induced him to make the payments by representing that her restaurant businesses were doing very well, taking between £700 to £1,000 a day, and that, in return for his investment in her businesses, he would have a 40% share and be provided with living accommodation above Natalie's café, which would enable him to bring his wife over from the Philippines. He was living temporarily with a daughter in Sutton. He soon discovered, while the defendant was away in the Philippines for her mother's funeral and he was working at Tropical Taste, that the takings there were nothing like what he had been led by the defendant to believe. The takings were as little as £300 a day on many occasions. It also turned out that the accommodation above Natalie's Café was unavailable for his occupation.
10. The contemporaneous letters sent to the claimant by the defendant's solicitors, Bokhari & Co, and by the claimant to the defendant are of critical importance. The solicitors sent a letter dated 12 June 2008 addressed to the claimant at 144 Church Road, where he was told by the defendant he could live, but was not in fact living. He said that the letter was given to him at Tropical Taste by the defendant. The letter was headed "Partnership Agreement-subject to contract." The solicitors said that they had been instructed by the defendant "in regard to a Partnership Agreement" with him, that they intended to prepare a draft agreement for his approval and that it was important that he should appoint his own independent legal representative to advise him. They asked him to remit half of the estimated legal costs of £500 plus VAT that they understood he had agreed to pay. No payment towards legal costs was made by him and no partnership agreement was ever put forward for his agreement.
11. At about that time the claimant began to work at Tropical Taste. He continued to do so while the defendant was away in the Philippines from about 22 June till 21 July 2008. He stopped working there on 6 August 2008.
12. During that period the claimant wrote a letter dated 7 July 2008 to the defendant at Tropical Taste asking for written confirmation of payment to record the details "of the agreement we have reached in relation to the four following payments totalling £80,000" made by him to the defendant. The dates and amounts of the payments were listed. The letter concluded as follows:-

"I think you will agree that as the contract has not yet been finalised I will require some form of proof that you have received these payments and I would appreciate if you could sign below to confirm."

13. The defendant signed that letter on her return from the Philippines on about 21 July. Its significance is that it is the only document in the papers signed by both parties.
14. The defendant's solicitors sent a further letter to the claimant at 144 Church Street and dated 21 July 2008. As with their previous letter, it was headed "Partnership Agreement-subject to contract." It referred to a telephone call from him on 27 June and recorded their view that it would be appropriate for him to appoint independent legal advisers to represent him in negotiating a partnership agreement.
15. On 6 August 2008 the claimant stopped working at Tropical Taste. During the time he had been at work there he had no access to any accounts, was never given a key to the premises and was not, the judge found, treated or trusted as a partner would normally have been.
16. On 19 August 2008 he demanded the immediate repayment of his money and stated his intention to terminate their business relationship. No partnership agreement or other formal document had ever been drawn up and signed by the parties.
17. The claimant sought restitution of his £80,000 on the basis that (a) it was paid by him to the defendant in circumstances in which no partnership at will existed between him and the defendant; and (b) the defendant's representations to him inducing him to enter into a partnership and to make the payments were untrue; and (c) there was a total failure of consideration.
18. The defendant's response was that the claimant was not entitled to the return of the £80,000 or to any remedy against her outside the winding up of a partnership. Her case was that she had been looking for a new business partner with money to invest in her businesses and that the claimant agreed to pay and in fact paid £80,000 into them in order to develop them and contribute to future profitability. He worked at Tropical Taste from 12 June 2008 till 6 August 2008, doing front of house manager duties pursuant to a legally binding arrangement with her. They were, she said, partners at will, as evidenced by his participation in the running of the business and the fact that he took £300 per week from the takings for five weeks. He then left the business and repudiated the agreement.
19. The defendant denied that she had made any misrepresentations to the claimant about accommodation above Natalie's Café or about the takings at Tropical Taste that had induced the claimant to enter into partnership and part with £80,000.
20. The claimant began proceedings in September 2009 for repayment of the £80,000 with interest for total failure of consideration, or for damages for misrepresentation, or for breach of contract. The defendant counterclaimed for an account of his receipts from the business and for damages for breach of contract.

The judgment

21. In view of the acute conflict of evidence between the parties, the judge had to make findings on the reliability of the witness evidence. He concluded that the defendant's evidence was unreliable. She had told him a number of things that were not true. No argument has been advanced on this appeal which would entitle this court to disturb that key credibility finding of the judge.
22. The judge concluded that there was no partnership at will and that the claimant was entitled to restitution of the £80,000. He held that no binding partnership agreement was ever reached, as it was envisaged that a formal written agreement would be drawn up. As it was never drawn up and nothing was signed, the parties should simply be restored to their original position.
23. The judge also found that, if there was a partnership, misrepresentations as to the availability of accommodation above Natalie's Café and the level of takings had induced the claimant to enter into it. It should be set aside and the £80,000 should be repaid. Alternatively, there was a total failure of consideration. The payments of £300 per week were for work done by him at the request of the defendant; no accommodation above the café was provided; he was not treated or trusted as a partner; and no partnership agreement was ever produced. Finally, the claimant had not repudiated any partnership agreement.
24. It appeared from an expert's report in evidence that the defendant had in fact used for non-business purposes over £48,000 of the money paid to her by the claimant. It was accepted that, if there were a partnership as she alleged, she would have to account to it for the sum applied by her for her personal purposes.

The defendant's submissions

25. Ms Start assisted the defendant and the court by making various submissions as to why the judge's order was wrong.

Partnership at will

26. In the first place, the judge fell into error in concluding that, because nothing had been reduced to a written agreement, there was no partnership, and in failing to apply Khan v. Miah [2001] 1 WLR 2123.
27. The facts were that both parties contemplated that there would be a partnership, in which the claimant would have a 40% share; that the claimant made payments of £80,000 to the defendant by 6 June 2008; that the payments were an investment on which he would obtain a financial interest in the two restaurants; that the parties agreed that the defendant would leave the claimant to conduct the business, so that she could attend her mother's funeral in the Philippines; that the claimant worked at Tropical Taste between 12 June and 6 August 2008; and that in later correspondence the claimant's solicitors gave notice of dissolution of the agreement and formally rescinded it.
28. The error of the judge was in finding that the absence of a written agreement precluded a partnership. No writing or formality is required in order to establish a partnership within the meaning of s.1(1) of the Partnership Act 1890, which defines a partnership as "the relation which subsists between persons carrying on a business in common with a view of profit." There was no requirement actually to participate in a profit share, though both parties had agreed that there was to be one: M Young Legal Associates v. Zahid (a firm) & Ors[2006] EWCA Civ 613 at[32]; [2006] 1 WLR 2562.
29. In Khan v. Miah the House of Lords held that there was a partnership at will between partners in a restaurant business, notwithstanding the absence of formal documentation and the fact that the business had not actually commenced trading. Lord Millett said at p.2128D-F:-

"…The question is whether they had actually embarked upon the venture on which they had agreed. The mutual rights and obligations of the parties do not depend on whether their relationship broke up the day before or the day after they opened the restaurant, but on whether it broke up before or after they actually transacted any business of the joint venture. The question is not whether the restaurant had commenced trading, but whether the parties had done enough to be found to have commenced the joint enterprise in which they had agreed to engage. Once the judge found that the assets had been acquired, the liabilities incurred and the expenditure laid out in the course of the joint venture and with the authority of all parties, the conclusion inevitably followed."

30. In this case there had been performance of the oral agreement and the failure to conclude a formal written agreement did not retrospectively unravel the earlier oral agreement, or negate the partnership at will that had come into existence on its being performed in the carrying on of the business at Tropical Taste in common with a view to profit, albeit for only a short period.
31. The Judge erred in holding that, because the joint venture terminated before the business had really got started, there was no partnership. It was submitted that a partnership at will had come into existence when the claimant paid the sums to the claimant for the purposes of the business and began to take part in running it.
32. The judge also erred in concluding that the parties were simply to be returned to their original position. Given the mixing of funds and the changes in position, there was no proper restitutionary basis for the return of the monies received by the defendant from the claimant.

Misrepresentations

33. As for the accommodation above the cafe, it was submitted that the judge's finding was undermined by the fact that there was no allegation of a representation that the accommodation was available, but rather a promise or agreement that the claimant would be provided with accommodation in the future. That was not a representation of past or present fact relating to the accommodation.
34. The judge was also criticised for speculating about how the solicitor's letters came to be addressed to the claimant at the address of Natalie's Café at 144 Church Street, whereas he was living in Sutton.
35. As for the level of takings, it was submitted that the judge gave no reasons for his conclusions and made no separate finding of fact that supported them.

Inducement

36. It was contended that the representation regarding the takings did not induce the contract, because the claimant knew the true position prior to making the payments. He also had an opportunity to observe the actual situation at the restaurant and to form his own view on the level of business on his visits to it before any money was paid.
37. Further, it was denied that the claimant relied on the alleged accommodation representation in entering into the partnership. The judge had failed to take into account the fact that the claimant was staying with his daughter and was not homeless, that his wife had not yet come over from the Philippines, that he would be paying market rent and that he knew that the accommodation was currently occupied by a friend of the defendant with marital difficulties.
38. The judge's findings of inducement were also challenged on the ground that the claimants' evidence about his reasons for handing over the money was inconsistent.

Failure of consideration

39. Finally, it was submitted that the judge erred in concluding that, even if there was some kind of partnership agreement, the consideration had wholly failed. The claimant had participated in the running of the business from 12 June 2008 until he left on 6 August 2008 and had received payment of £300 per week for five weeks. That constituted some consideration. The defendant received performance by entering into the status of partnership, by receiving a partnership interest and by becoming entitled to a share of profits.

Discussion and conclusions

40. I have no difficulty in agreeing with Ms Start that it is legally possible for a partnership to come into existence before a formal written agreement is executed, or without any formal legal document ever being executed.
41. However, in this case the contemporaneous correspondence, though minimal, could not be clearer on the key point: the parties did not intend the legal relationship of partnership to exist between them, unless and until they had entered into a formal written partnership agreement.
42. The references in the two letters from defendant's solicitors' letters to "Partnership Agreement-subject to contract" are crucial. The first letter was written soon after the payments were made and on the date when the claimant began to work at Tropical Taste. The second solicitors' letter was sent when he was still working there. The in-between letter signed by both parties refers to a contract not yet being finalised and it never was finalised, as contemplated, in the form of a written agreement.
43. In my judgment, quite apart from the judge's conclusions on the oral evidence and the credibility of the parties, those three letters point to only one conclusion, namely that the parties had no intention of entering into the legal relationship of partnership without having first executed a formal written agreement.
44. Lawyers (and even business people without legal qualifications) normally know that, in practice, the intended effect of the expression "subject to contract" in negotiations for an agreement is that matters continue to be in negotiation; that, before a formal contract is executed, neither side is contractually bound by a "subject to contract" arrangement or understanding; and that each side is accordingly free to withdraw from the proposed transaction without incurring legal liability for breach of contract: see Megarry & Wade The Law of Real Property (8^th Edition- 2012) at paras 15-010 and 15-011.
45. As that citation indicates, the expression "subject to contract" is routinely used in England in relation to agreements for the sale of land and the machinery for the formal exchange of contracts. But the general principle of being able to make an arrangement or understanding conditional on the execution of a formal document in the future is not so limited, as appears from Chitty on Contracts (30^th Edition-2008) at paragraph 2-118.
46. Having regard to the timing of the "subject to contract" solicitors' letters after the payments were made and while the claimant was working at Tropical Taste, I do not think that it can be contended that the parties by their conduct ever converted their "subject to contract" stance regarding a partnership into an unconditional and binding agreement, or into an actual partnership giving rise to partnership rights and obligations.
47. It also normally follows that, if the matter expressly made "subject to contract" does not proceed to a formal contract, transfers of money made in anticipation of a formal binding contract should be returned to the person who has made them. The claimant made the payments to the defendant on the basis of an anticipated partnership that did not materialise, because it was "subject to contract" and no formal contract was ever executed. The case falls within the general principles of "failure of basis" fully analysed in Chapter 16 of Goff & Jones on The Law of Unjust Enrichment (8^th Edition-2011). See also Halsbury's Laws (4^th Edition-2007 re-issue) Vol 40(1) at para 88 (The meaning of 'failure of consideration') for the following neat statement of the principle:-

"….Thus a claimant who pays money to the defendant on a 'subject to contract' basis and who then decides that he does not wish to go through with the purchase is entitled to recover from the defendant the sum so paid…"

48. In those circumstances the defendant has not even begun to show that the judge was wrong in his rejection of a partnership at will between the parties, or in ordering the £80,000 to be repaid to the claimant.
49. As no concluded binding agreement for a partnership was ever in existence between the parties who expressly intended that there be such formalities, it is unnecessary to deal with the detailed submissions on the two misrepresentations that the judge found had induced the claimant to enter the partnership and part with his money.

Result

50. I would dismiss the appeal. The defendant has not established that the order made by the judge was wrong. He did not misdirect himself on the law or its application to the facts found by him. On questions of disputed fact his findings were based on the evidence before him and on his considered views on the credibility of the witnesses.
51. In brief, for all the talk of a partnership at will, of actionable misrepresentations and of repudiatory breach, this, though not pleaded as such, is a stark case of unjust enrichment: the defendant was enriched by the £80,000 she received from the claimant; her enrichment was at the claimant's expense; the defendant's enrichment was unjust, because the "subject to contract" basis on which the claimant paid the £80,000 failed for want of a formal contract; and uncomplicated considerations of justice demand that the claimant should have his money back and that the defendant's wholly unmeritorious stance should fail. A just person would have repaid the money without being sued for it.

Lady Justice Black:

52. I agree.

Dame Janet Smith:

53. I also agree.