England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
ANTHONY ELLERAY QC,
SITTING AS A DEPUTY HIGH COURT JUDGE

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/06/2013

Lady Justice Arden :

1. This appeal arises out of arrangements which the appellant, Mr Stephen Ilott, made with the respondents to give him a share of the profits of a new asset management business which he and the respondents established. There were numerous issues raised on this appeal but the answer to the appeal seems to me to be clear and therefore it will not be necessary to deal with them all. However the submissions of Mr Robin Knowles CBE QC, for Mr Ilott, and Mr Michael King, for the first three respondents (Mr Williams, Dr Cooper and Mr McCaffery respectively) demonstrate that there are certain aspects of the law on the formation of partnerships that could usefully be clarified.
2. Mr Ilott is experienced in the field of asset management. In 2008, he and the first three respondents, whom I shall call collectively "the Four", developed a new concept of absolute return asset management with a view to establishing and running a new business together. However, while they could provide the expertise, they would need to join forces with another organisation in order to obtain finance for the business and financial services regulatory approval. They made presentations to potential investors. Finally they entered negotiations with the fourth respondent ("BlueCrest LP"), a limited partnership. On 28 July 2008, the general partner of BlueCrest LP, namely BlueCrest Management Ltd ("BCML") issued a letter, known in these proceedings as "the Side Letter", recording the agreed division of profits, promising to secure that the Four became limited partners of BlueCrest LP and scheduling outline terms about the new business and the calculation of profits. (BCML subsequently changed its name but nothing turns on that). The new business was to be run as a division of BlueCrest LP. The Four were to receive 40% of its profits and BlueCrest LP the remaining 60%.
3. In July and August 2008, the Four executed employment agreements with BCML. On 1 November 2008 they executed deeds of adherence to the partnership deed constituting the BlueCrest LP partnership. The terms of the Side Letter were not replicated in these documents.
4. The investment funds which the Four were to manage were incorporated in Luxembourg with BlueCrest LP providing the seed capital.
5. On 1 December 2008, BlueCrest LP's business was restructured. BlueCrest LP transferred its assets and liabilities to BlueCrest LLP, a limited liability partnership formed under the Limited Liability Partnerships Act 2000. BCML became a designated member of BlueCrest LLP, and the Four became members of BlueCrest LLP.
6. The Four's new business was very profitable. The profits for the three financial years ending 30 November 2011 totalled £19m. However, in late 2009, differences of approach emerged between Mr Ilott and the other members of the Four. Mr Platt, one of the founders of the BlueCrest group, decided that Mr Ilott should be removed as a member of BlueCrest LLP. Mr Ilott received notice to this effect on 26 November 2009, four clear days before the end of the financial year. No distribution of profits has been made to Mr Ilott for the financial year ended 30 November 2009 or any of the two subsequent years when the other members of the Four were conducting the business.
7. At the trial before Anthony Elleray QC, sitting as a deputy judge of the High Court of Justice, Chancery Division, Mr Ilott advanced alternative claims for his share of the profits for these three financial years (1) against the other members of the Four on the grounds that the Four were in partnership with each other; (2) against BlueCrest LP on the basis that it was liable under the Side Letter to pay these profits to him; and (3) against BlueCrest LLP on the basis that the liabilities under the Side Letter had been novated to it.
8. The first question is whether Mr Ilott can establish that he and the other members of the Four entered into a partnership in April 2008. The judge approached this question by listing what the Four had done both before and after this date. They were all by then or shortly thereafter free from previous employment restrictions. Two of them had specifically left earlier employment in order to join the other two in an investment management business. The Four had identified the basic concept for the new business and decided on their respective roles and so on.
9. Nevertheless, the judge found that they had not become partners. He held that they had made their presentations on the basis that they were willing to go into investment business. They had not decided on the business vehicle which they would use. On the judge's findings, none of the Four contemplated carrying on business without limited liability. The ultimate form of their business vehicle, and the acquisition of assets and incurring of liabilities would depend on the agreement reached with the outside investor. The judge agreed with the submission of Mr King that "creating Powerpoint slides, planning pitch meetings and thereafter attending pitch meetings is not a business."
10. Mr Knowles' primary submission is that the judge did not ask himself the right question. He submits that the judge wrongly thought the Four had actually to have established the business in order to be in partnership. The partnership on Mr Knowles' submission was about establishing as well as running an investment business. He relies on the speech of Lord Millett in Khan v Miah [2000] 1 WLR 2123, with which the other members of the House of Lords agreed. That meant that, once the arrangements with BlueCrest LP were established, the partnership's business was that of receiving the distributions under the Side Letter. The partnership therefore continued to exist in parallel with the membership of BlueCrest LP. On Mr Knowles' submission, the Side Letter represented the fruits of the partnership.
11. Mr Knowles submits that the presentations which the Four made to prospective investors in their business were consistent with their embarking on a joint venture, all other things being equal. Contrary to what the judge held in paragraph 99 of his judgment, it was not essential that they should have established some vehicle for this purpose. It is correct that the partners did not want the unlimited liabilities of a partnership business. However, Mr Knowles submits that that does not prevent the activity of establishing the business from being a business in itself. All it meant was that if they did not find an appropriate limited liability vehicle, the partnership did not succeed. There was no need for the Four to acquire any asset because they were exploiting their own ingenuity and creativity and investment skills. Only a small amount of expenditure was involved.
12. Mr Michael King, for the first three respondents, submits that there was no partnership in advance of the Side Letter because there was no carrying on of business and no acquisition of property of the alleged partners. There were a number of discussions, as the judge pointed out in paragraphs 96 and 97 of his judgment. There was a list of things which had not been done. What happened in this case was that, once the Four joined BlueCrest LP, their business became that of BlueCrest LP. The mere receipt of distributions from BlueCrest LP would not in itself be a partnership business. Furthermore, the question whether there was a partnership in the period April to July 2008 was supremely a matter for the judge. The fact that the Four were not authorised by the Financial Services Authority to carry on investment business was an indication that they were not in a partnership at this stage.
13. In my judgment, the judge was correct to hold that there was no partnership between the Four. Nothing turns on the fact that there was no formal partnership deed since the relation of partnership can be formed by conduct and without any need for a written contract. However, there must be a carrying on of business. Section 1(1) of the Partnership Act 1890 makes it clear that it is not the mere agreement to establish a partnership or the setting up of a partnership that renders the parties partners: there must also be an actual carrying on of business with a view of profit. Partnership is there defined as:

"the relation which subsists between persons carrying on business in common with a view of profit."

14. In Khan v Miah [1998] 1 WLR 477, this court held that persons who had acquired premises to be fitted out as a restaurant but had not opened the restaurant for business were not in partnership. The House of Lords allowed the appeal: [2000] 1 WLR 2123. It was not necessary to find actual trading. What was required was a carrying on of business. Lord Millett, with whom the other members of the House agreed, held:

"There is no rule of law that the parties to a joint venture do not become partners until actual trading commences. The rule is that persons who agree to carry on a business activity as a joint venture do not become partners until they actually embark on the activity in question. It is necessary to identify the venture in order to decide whether the parties have actually embarked upon it, but it is not necessary to attach any particular name to it. Any commercial activity which is capable of being carried on by an individual is capable of being carried on in partnership." (emphasis added)

15. Accordingly, preparatory work, which a business needs to carry out before it can start trading, forms part of the carrying on of business and the fact that there is no actual trading does not mean that the business cannot be carried on "with a view of profit". Lord Millett cited the example of a film-making business, where the film rights have to be bought, the script commissioned and so on before any filming took place. Likewise a restaurant business, where the restaurant needed to be fitted out, would commence before the first customer walked through the door.
16. Khan v Miah did not, however, eliminate any distinction between preparatory arrangements and partnership. Section 1(1) reflects deliberate legislative policy that there must be more than a mere decision to set up a business; there must actually be the "carrying on [of] business in common with a view of profit." As Lord Millett makes clear, the putative partners must actually have embarked on the venture that they have agreed to carry on jointly.
17. Mr Knowles criticises the judge for wrongly characterising the venture and excluding the process of establishing the business. But there are two answers to this criticism. First, the judge cited Khan v Miah at length. While he did not set out the entirety of the passage I have cited above, there can be no doubt that he was aware of the distinction which lay at the centre of that case between running a business in common once the preparatory work was done, and taking steps preparatory to actual trading. Second, it is not enough simply to identify the business on which the parties have agreed to embark. The judge has then to go on to decide whether the parties had done enough to be found to have commenced that business. As Lord Millett held later in his judgment:

"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."

18. When the judge decides whether the parties took a particular step, he is making a finding of primary fact. But when he determines that they have, or have not, done enough to be found to have commenced their venture, he is making an evaluation of the facts and he is not simply making an inference from the facts. He is exercising his judgment as to whether enough was done to constitute the parties partners in a partnership. For example, one of the matters for him to weigh up was the fact that the Four had not acquired any significant property for the purposes of their new business. This did not mean that there was no partnership but it was an indication that they did not regard themselves as partners and that they were not partners. The significance of the judge's role is that this court would not intervene to set his evaluation of the evidence aside unless he was clearly wrong (see generally Assuricazione Generale SpA v Arab Insurance Group [2003] 1 WLR 577 per Clarke LJ at [14], approved in Datec Electronic Holdings v United Parcels Service Ltd [2007] 4 All ER 765).
19. I do not consider that the judge's conclusion can be described as clearly wrong. The parties had a concept for a new business but as of April 2008 they had no means of creating any profit, and they had made no financial commitment apart from buying a domain name. The judge did not make a finding as to the cost involved in acquiring the domain name but there is no suggestion that it was significant. There is no evidence that any of the Four sought to bind the other members of the Four. There was no agreement as to the business form which the Four would adopt for their business. There was no assurance of funding or of having the means to obtain regulatory approval. The questions of external funding, business model and regulatory approval were regarded by the parties as vital pieces of the jigsaw. In my judgment the judge was entitled to conclude that, without them, the parties were not bound together as partners.
20. Any other conclusion would be contrary to common sense since the parties clearly contemplated that the nature of their relationship should ultimately depend on the nature of the vehicle chosen for their business. There was simply no point in having an ordinary partnership to cover their limited activities in the meantime. Furthermore, the idea that they became partners under the general law is wholly inconsistent with the desire of all the members of the Four that they should carry on the new business with limited liability.
21. In any event, if there was a partnership, it was, as the judge held, dissolved on entry into the arrangements set out in the Side Letter. The partnership could not co-exist with these arrangements for the simple reason that the business became that of the BlueCrest organisation. The parties never envisaged that there would be a partnership whose sole business was the receipt of distributions from BlueCrest LP (see, generally, Chahal v Mahal [2005] 2 BCLC 655). Those distributions were to be paid to the Four as a group as a matter of convenience, not because they were in partnership.
22. The conclusion that there was no partnership between the Four means that Mr Ilott has no claim against the first three respondents. The question whether the judge was right to conclude that Mr Ilott could not obtain any relief against the other members of the Four because he had not sought any declaration that their partnership had been dissolved does not arise.
23. Mr Ilott can still, however, recover his share of the profit from BlueCrest LP or BlueCrest LLP if he is entitled to a share of the profits of the investment business under the Side Letter which they became liable to pay for any of the three financial years. However the Side Letter contains the following proviso:

"Provided that each of you remains a limited partner (and has not served the Partnership with notice of your resignation nor received a Notice of Removal) at all relevant times and subject to sufficient profits being available in the Partnership and the terms of this letter, BCML shall procure that the collective allocation of income profits allocated to you and your team from the Partnership from the date on which you all become admitted as limited partners of the Limited Partnership shall reflect the terms set out under the heading "Economic Arrangements" in the document entitled "Outline Proposal For Active Fixed Income Business", a copy of which is attached to the Schedule 1 to this side letter for ease of reference." (emphasis added)

24. Mr Ilott physically received notice of his removal as a partner of both BlueCrest LP and BlueCrest LLP on 26 November 2009, effective thirty days later. (No point is taken on the fact that the notice only became effective at the later date). The then current financial year ended on 30 November 2009.
25. The next question is whether the "relevant times" for the purposes of this proviso include either the last day of the current financial year, or the date on which the profits for that year were allocated to the Four: if so, Mr Ilott was not entitled to share in the profits for the then current financial year even though he had worked to create those profits in 361 out of 365 of the days in that year. Mr Miles submits that the relevant time is the time when profits are actually allocated. Mr Knowles submits that neither date is a relevant time for the purposes of the proviso and that, if BCML serves notice of removal of a partner in the course of a financial year, the profits of the current year must be time-apportioned so that the outgoing partner receives his share of the profits down to the date on which he receives notice of removal. Therefore, on his submission, BlueCrest LP has to draw up accounts for the broken period, that is up to the date immediately prior to notice of receipt of removal, to enable a profit computation to be made. The date of receipt of the notice of removal and the normal date for the year-end would not then be relevant times, nor would the date of allocation of profits.
26. I do not propose to decide the question whether the date on which the profit allocation takes place is not a relevant time for the purpose of the proviso and I will assume in Mr Ilott's favour that it is not a relevant time.
27. Mr Ilott then needs to establish that the date on which he received the notice of his removal was not a relevant time because there is an obligation to make an allocation of profits to him for the period up to his removal. In my judgment, the proviso contains no such obligation. There is no provision for computing such profits. There is no obligation in the Side Letter or the schedule to it to draw up an extra set of accounts for this purpose if a person receives notice of removal. It would not be simply a question of extracting the relevant figures from the accounting records because losses that had not yet been paid and profits that had not been received might have to be taken into account, and expenditure made during the period might have to be time-apportioned. The accounts for the broken period would therefore clearly involve extra effort and expense. In those circumstances, the parties would have to have made provision in their agreement for those accounts to be drawn up.
28. Since Mr Ilott fails on this point, he cannot succeed in any claim against the fourth and fifth respondents for them to pay any share of profits to him.
29. This construction of the Side Letter entails harsh results for Mr Ilott. However, the court's obligation is to give effect to the parties' agreement. The court cannot re-write the agreement to accord with what the court might think fair. There are instances in the authorities, including the case of Commerzbank AG v Keen [2007] IRLR 132, where the court has upheld terms that a party should not receive a bonus because he had ceased to be an employee by the end of the financial year in question.
30. That leaves Mr Ilott's challenge to the service of the notice of removal. The board of BlueCrest LLP had the absolute right to remove any individual member by serving notice of removal if it:

"considers the service of such a notice to be in the best interests of the Partnership…."

31. Mr Knowles did not suggest that the power of removal in the partnership deed constituting the BlueCrest LP partnership was materially different from that in the BlueCrest LLP deed.
32. Mr Ilott's case is that it was an implied term of the power of removal that it should only be exercised rationally, that is, if the board considered on rational grounds that it was in the best interests of BlueCrest LLP to remove Mr Ilott as a member and that that term was breached. Mr Knowles points out that the decision to remove Mr Ilott was an extremely serious one as far as Mr Ilott was concerned. The decision to serve the notice was taken by Mr Platt, one of the founding partners of BlueCrest LP and BlueCrest LLP, who took the decision on behalf of the board of BlueCrest LLP. Mr Knowles contends that the sole basis for Mr Platt's decision was a threat made by Dr Cooper and Mr Williams that, if Mr Ilott was not removed, they would leave the business. Mr Platt himself accepted in cross-examination that the decision to serve the notice was made purely as a matter of "economics". Mr Knowles submits that it can never be in the interests of a partnership to make a decision about removal on the basis of a threat of this kind. Mr Knowles accepted that the power had been exercised in good faith.
33. We did not ask Mr Robert Miles QC, for the fourth and fifth respondents, to address us on this point as we were satisfied that, even if the term were to be implied, there was no basis on the judge's findings for contending that the term was breached. Inevitably, a contention that a decision is one that could not rationally be made has to surmount a high hurdle.
34. The findings made by the judge show that the removal of Mr Ilott was not taken solely on the basis of the threat made by Dr Cooper and Mr Williams in isolation. Mr Platt reached his conclusion after delegating the task of finding out what was happening as between the Four to Mr Dodd, the Chief Financial Officer of BCML. Mr Dodd tried to keep the Four together but he found that their differences were irreconcilable. Mr Platt made a commercial decision, and, as the judge said, the decision cannot be criticised because it was made ultimately for economic reasons. Mr Platt considered that Dr Cooper and Mr Williams were worth more to the business than Mr Ilott. Mr Ilott had had the chance to put his side of the case. Mr Platt was entitled to conclude that removal was in the best interests of "the Partnership", BlueCrest LLP. (In law, this was a separate legal entity from its partners (Limited Liability Partnerships Act 2000, section 1(2)).) It is, therefore, clear on the judge's findings that the decision to remove Mr Ilott was not made on the sole ground for which Mr Knowles submits. Moreover, the reasons for which it was made were capable of rationally being considered to be in the best interests of BlueCrest LLP.
35. In those circumstances, even if Mr Knowles is correct on his argument for an implied term as to rationality in the power of removal, there was no breach.
36. Therefore, Mr Ilott does not have any claim against the fourth and fifth respondents for a share of the profits for any of the three financial years ended 30 November 2011.
37. It follows that it is not necessary to deal with any of the further issues raised by Mr Miles as to whether the Side Letter was legally binding on either the fourth or the fifth respondent, or as to the effect of wrongful removal, had it been shown.
38. Accordingly I would dismiss this appeal (1) against the first three respondents on the grounds that there was no partnership between them and Mr Ilott, and (2) as against the fourth and fifth respondents on the grounds that, following receipt of a notice of removal, Mr Ilott was no longer entitled to a share of the profits under the terms of the Side Letter in respect of the then current, or any subsequent, financial year.

Lord Justice Kitchin:

39. I agree.

Sir David Keene:

40. I also agree.