England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Claim No. HC 07C00733
		10th March 2009

1. From 1991 until 31^st March 2001 Mr Tann and Mr Herrington carried on business in partnership under the name "Herrington & Associates" ("Herringtons"). Following the dissolution of their partnership they are in dispute as to their final account and Master Teverson has directed the trial of two substantive issues in this court.
2. The first is whether the partnership was dissolved on 31^st March 2001 or whether Mr Tann retired from the partnership on that date and if so on what terms as to the division of the partnership assets.
3. The second is whether a liability in damages to a client, for which the firm's professional indemnity insurer has refused indemnity, is a liability of the partnership or whether Mr Herrington must bear the liability (and the partnership's legal costs) personally because it was he who was responsible for notifying the insurers that a claim had been made and his delay in doing so caused the refusal of indemnity.

The Background in Brief:

4. Mr Tann is an architect and Mr Herrington a chartered surveyor. Mr Tann first worked with him in 1981, doing work experience while in training. After qualification, he went to work in the same firm as Mr Herrington and, when Mr Herrington set up his own business in 1989, Mr Tann joined him and a short while later became his partner. Initially he took a profit share of 15%, which increased by annual increments over 5 years to a share of 45%.
5. At some time between 1991 and 1993 Mr Herrington circulated a draft deed of partnership. The document was not in fact ever executed, though it is admitted by Mr Tann that the terms set out in the draft were accepted by both as binding. I shall therefore refer to it as the Partnership Agreement.
6. The Partnership Agreement contained many of the usual provisions in standard form. The term which will concern us is the one providing for "retirement", which I will set out a little later in this judgment.^[1]
7. It appears that Mr Tann applied himself to his work diligently but did not involve himself in the business affairs of the firm. At a later time he would regret this and Mr Herrington would use it to criticise him; at the time however the arrangement suited them both, especially Mr Herrington who seems to me to have been quite happy to keep control of affairs. In particular, it was Mr Herrington who was responsible for dealing with all aspects of the firm's professional indemnity insurance; that is to say, he dealt with the firm's brokers, made the necessary proposals and renewals in December of each year, in which of course he had to declare whether there had been a claim made during the year; he had to arrange for payment of the premium and annually received the policy and certificate of insurance and had to check and verify whether the terms of the policy were correct. He accepted that he knew he had a duty to give notice to insurers of a claim made against the partnership as soon as was possible and that, if he did not do so, it could cause serious consequences for the firm as the firm might have to pay the claim itself and its own costs.
8. The firm grew on the surveying side and Mr Herrington recruited assistant surveyors, one of whom was a man called Andrew Robertson whom he proposed to introduce into the partnership. He discussed the matter with Mr Tann and put his proposal to him in a letter dated 3^rd January 2001. As regards remuneration, Mr Herrington proposed that he would receive annually a fixed salary of £55,000, Mr Robertson £35,000 and Mr Tann £30,000; the remaining profit would then be apportioned as to 65% to Mr Herrington, 25% to Mr Robertson and 10% to Mr Tann.
9. Mr Tann was unhappy about the proposals and, after frank discussions, responded on 6^th February 2001 saying:

"I acknowledge that Andy's efforts need to be recognised but I cannot agree to the proposal you have put forward. I therefore feel my only sensible option at this point in time is to advise you of my intention to leave the partnership, subject to your agreement, and I therefore give you two months written notice of my intention to leave". [Emphasis supplied]

10. Mr Herrington replied on 9^th February 2001 stating inter alia:

"I am sorry that we have not been able to see the matter in the same way as one another. The Partnership will therefore be dissolved on 31^st March 2001. ...". [Emphasis supplied]

11. On 19 February Mr Tann sent Mr Herrington a document entitled "Partnership Dissolution Proposals" in which Mr Tann made proposals as to how they should resolve the legal, accountancy, premises, and operational and other issues necessary to draw up appropriate dissolution accounts. It is possible to see from this document that Mr Tann's proposals reflected some of the headings in the Partnership Agreement. Mr Herrington responded to the proposals four days later. There was very little if any disagreement on the main proposals and such disagreement as there was appeared to have been largely resolved over the following weeks.
12. As regards the partnership premises, 28 Easton Street, it was agreed that a valuation would be carried out by an agreed independent surveyor or be the average of two valuations and that payment of any capital sum due in relation to it would be paid over 2 years by lump sum.
13. It is not entirely clear why the affairs were not resolved in short order but there did appear, during the following weeks, some difficulties over some of the expenses claimed by Mr Herrington and about a proposed division of certain of the firm's property. In the result, an initial flurry of activity diminished, became sporadic and faded out.
14. On 28^th April 2005 Mr Tann renewed contact in the following terms:

"Hope all is well.

As you are aware, little progress has been possible on finalising the accounts due to lack of coherent, detailed information. To help overcome this impasse, I believe it would be a good idea for us to meet informally to discuss the principles of how we can reach agreement on the accounts and perhaps more importantly, what we do with 28 Easton Street [the partnership property].

I look forward to hearing from you in due course."

15. It was not until 10^th August 2006 that the two men met again by arrangement at the Polecat Public House in Prestwood near Great Missenden, Berkshire. It is clear that they discussed how they should apportion the value attributable to 28 Easton Street, whose value had by now increased substantially from what it had been in 2001. They also discussed what provision ought to be made for payment to Mr Tann in respect of the continuing occupation of the premises by the continuing business.
16. Following the meeting correspondence continued on the matters remaining in issue between them, when out of the blue came a letter from the accountants for the partnership bringing new and important information. The letter in question was dated 30^th November 2006 and informed Mr Tann of terms of settlement which had been reached with Mr and Mrs Carter, clients of the firm between 1999 and 2001, of a claim by them for professional negligence. The overall liability amounted to £226,000 made up of a payment of £185,000 to the Carters, the further sum of £40,000 for the legal costs of defending the action and the (generous) sum of £1,000 for the accountancy costs of reflecting the above change to the accounts. Mr Tann insists he knew nothing about the claim until that moment. Although this is disputed by Mr Herrington, it is my judgment that Mr Tann is correct in this.
17. It was and is Mr Herrington's contention that the liability was a liability of the partnership and he sought to debit Mr Tann's account with 45% of the liability to the Carters and the legal costs of the firm. Mr Tann refuses to accept this. He contends that the loss was caused by Mr Herrington's breach of his duty of care to the firm and he should therefore bear it on his own; alternatively that it was caused by a breach of his duty to make full disclosure of partnership assets and liabilities.
18. I propose now to deal with each issue in turn.

The Dissolution/Retirement Issue:

19. This issue arises largely because of the likely increase in the market value of 28 Easton Street, between March 2001 when Mr Tann left the partnership (when the property was said to be worth in the region of £290,000, though this is in issue) and now. If the accounts are to be drawn up to reflect the position at the date when the

parties ceased to be partners then obviously a lower figure, representing the value in March 2001, will be the one brought into account; if they are to be drawn up as at the present date, then a much higher value will be brought into account to the substantial benefit of Mr Tann.

20. At the time the issue was formulated it was perceived that, if the partnership came to an end by dissolution, the accounts would be settled as on a dissolution pursuant to the Partnership Act 1890 and this would be at current date and values; whereas if the partnership came to an end by the retirement of Mr Tann, pursuant to the Partnership Agreement, the account would be drawn up as at 31^st March 2001.
21. The starting point of an examination of this issue should be the Partnership Agreement. Clause 16 is headed "OUTGOING PARTNER" and so far as material stated as follows:

"A. In this Clause the expression "an event" shall mean:

1. The death of a partner

2. The retirement of a partner by agreement

3. The expulsion of a partner in accordance with the provisions of Clause 15 hereof

4. If either of the Partners shall cease to be a partner by reason of an event the provisions contained in this Clause shall have effect.....

6. The sum which upon taking the said account shall appear to be due to the Outgoing Partner in respect of:

a. His current account and

b. His capital

shall be paid to him within six months by the Continuing Partner or at his election (as to all or part thereof) by equal six monthly instalments over a period of five years...."

22. It is clear that if there were "a retirement of a partner by agreement" the method of distribution for which provision is made in sub-clause 6 will apply, to the effect that the value of 28 Easton Street at the time of the retirement will be brought into account.
23. In his Particulars of Claim Mr Tann, while apparently acknowledging that the terms of the draft unsigned Partnership Agreement were accepted and acted upon by both partners, did not accept that clause 16 applied; the reason he gave was his contention that clause 16 had been varied, after he had sent his letter dated 6^th February 2001, when the parties subsequently agreed that the determination of their business relationship should be by "dissolution". In support of this argument Mr Tann relied upon the letter of response from Mr Herrington on 9^th February 2001 (see at paragraph 10 above) and listed a number of instances within the documentary exchanges between them where the word "dissolution" was used. He contrasted this with the sole occasion on which there was reference to the word "retire", that appearing in a letter to clients drafted by Mr Herrington to which he did not give his authority.
24. There were however at least four serious difficulties about this argument: first of all, this was a two partner firm (as reflected in the terminology of the Partnership Agreement) and inevitably the departure of one partner amounted to a dissolution of the partnership; the business might, as Mr Herrington argued, have continued, but the partnership nonetheless dissolved. Since a retirement caused a dissolution, the question could not appropriately be answered by asking for a ruling whether the one or the other occurred.
25. Secondly, once it was accepted that the Partnership Agreement applied to their relationship, the only appropriate question was whether clause 16 applied to the departure of Mr Tann on 31^st March 2001 or whether there was indeed a variation of the Agreement to provide some other consequence.
26. Thirdly, I am quite satisfied that neither Mr Tann nor Mr Herrington had any thought that there was the slightest difference whether they called their parting a "retirement by agreement" or a dissolution. Neither of them knew the practical consequence to the method of distribution of the application of the rival terms.
27. Fourthly, it therefore became quite unrealistic to argue that the two men had the necessary intention to vary the terms of clause 16 and substitute an agreement to dissolve their partnership in accordance with the procedures under the Act.
28. The conclusion to which I must come therefore on the retirement/dissolution issue is that Mr Tann retired from the partnership pursuant to clause 16 A. 2. of the Partnership Agreement and the provisions set out in that clause apply to the drawing up of their final account and the distribution of the firm's assets. The only variation from those terms are the matters specifically recorded on the schedule of agreed issues [at D 334] which includes both a substitution of a valuation of 28 Easton Street, rather than "book value", and a variation of the date when payment of capital relating to the property was to be made to Mr Tann, was to be as recorded in paragraph 12 above.

The Professional Negligence Claim and Issue:

29. The fine detail of the background giving rise to the underlying liability to the Carters does not need to be told in detail. The story is briefly as follows.
30. At some time during September 1999 Mr and Mrs Carter were engaged in undertaking extensive works of reconstruction to a property they owned called "The Bull Pen". They instructed a contractor called Julson Construction ("Julson") to perform the main works, subcontractors to perform other work and retained Herringtons inter alia to certify the value of works completed. The Carters disputed the quality of Julson's work and complained bitterly both to Julson in the first instance and then to Herringtons. A schedule of defects was drawn up and Herringtons accepted the validity of the Carters' complaints but was not able to persuade Julson to remedy the defects.
31. I have been taken through the correspondence passing between the Carters, Julson and Herringtons. I accept the validity of the point made by Mr Herrington that it did not initially appear as though the Carters' complaints were made for any other reason than to persuade Herringtons to use their influence to persuade Julson to remedy the defects. I note that the Carters withheld one half of Herringtons' agreed fee. Yet I am not persuaded that the correspondence up to the end of November 2000 imposed on Mr Herrington the need to make a report to insurers or, even if as a matter of technicality it did, that insurers would have refused indemnity because he did not. I also perceive a degree of frustration in Mr Herrington's letter to Mr Carter dated 1^st December 2000 saying:

"Your letter of today's date seems to imply, for some reason, that I am responsible - but short of my physically doing the work myself, of which I am not capable, there is little more I can do to help you."

32. By letter dated 4 December 2000, Mr Carter wrote to Herringtons stating that he did consider that Herringtons was responsible in this matter because Herringtons undertook to supervise the construction work and authorised payment of all outstanding monies to the contractor: he was going to have to institute remedial works

"and would look to recover all associated costs from Herringtons and Julson Construction hereafter". Mr Herrington responded disputing responsibility and said that he was not prepared to undertake any further work; Mr Carter could quite easily get another contractor to do the work by issuing the agreed Schedule of Defects to a contractor of his choice. The letter ought in my judgment to have caused Mr Herrington at least a significant degree of concern as to where the complaints might lead.

33. On 15^th May 2001 Mr Herrington received a letter of claim from a firm of solicitors retained by the Carters called Myers Lister Price. It read, so far as material, as follows:

"LETTER OF CLAIM

We have been instructed by [Mr and Mrs Carter] to pursue a claim against you for professional negligence and/or breach of contract.

We are instructed that your services were engaged by our clients to act as a Contract Administrator and Supervisor of Construction Work for our client' barn conversion....

Details of the allegations against are as follows:

1. You failed to supervise adequately or at all the building works undertaken by Julson; in particular you failed to ensure that the building works undertaken were in accordance with the approved plans and that the works met with building approval.

2. You failed to ensure the builders worked to a satisfactory standard and with reasonable care and skill.

3. You failed to ensure that the building works were completed.

4. You failed to act in accordance with your agreed instructions.

Our clients have therefore suffered loss as a result of your negligence and/or breach of contract....

In the circumstances please confirm within the next 14 days that you admit liability in this matter and we will take steps to quantify the damage.

We will shortly be sending you details of a proposed independent building expert who can prepare a report on a joint basis on the building works and the cost of remedial action........

We strongly advise you to forward a copy of this letter to your insurers as failing to do so may affect your insurance policy cover. Please provide us with details of your insurers.

We look forward to hearing from you."

34. Mr Herrington responded on 17^th May 2001 in the following terms:

"We acknowledge receipt of your letter dated 15^th May advising of your clients' spurious claim.

As required by our Institution and the terms of our Professional Indemnity Insurance, we will advise our insurers of your suggested impending claim, the detail of which is denied and which will be vigorously defended.

In the interests of costs to all parties, yours as they are probably on a no-win/no-fee basis and ours because, if you proceed to action, we will defend and counterclaim, we strongly urge you to obtain full disclosure from your client at this stage. There is detailed correspondence with your clients on the matters you present and clearly refute the allegations. If such correspondence has not been made available to you we are more than willing to furnish you with copies."

He asked that further correspondence be addressed to his solicitor Mr Bomken.

35. In fact, contrary to what he represented in his letter, Mr Herrington did not immediately notify either his broker or his insurer of the receipt of the Letter of Claim.
36. On 30^th May 2001 Myers Lister Price wrote further stating that they intended:

"... to instruct an independent Quantity Surveyor to prepare a report on the defects of the building, any potential professional negligence in respect of the building work and the costs of any remedial action. At this stage we do not intend to ask the Quantity Surveyor to comment on your client's potential negligence. He is merely to examine the building works themselves."

The letter concluded by identifying the quantity surveyor in accordance with what was evidently a Pre-Action Protocol. Mr Herrington neither replied nor reported the event to his insurers.

37. Nothing further was heard from Myers Lister Price until a letter dated 7^th February 2003 requesting Mr Herringtons to confirm the address of Mr Bomken and details of Herringtons professional identity insurers. The letter seems not to have been answered.
38. On 24^th January 2004 Myers Lister Price sent to Herringtons a copy of the report of their quantity surveying expert, stating that the contents were "self explanatory and set out in detail your liability in this matter", and that they intended to pursue proceedings for damages. They made a claimant's Part 36 offer to settle the claim at £150,000 plus costs.
39. On 26 January 2004 Mr Herrington forwarded the letter and report to his insurance brokers who forwarded it to their insurers. The policy had incepted on 24^th January 2004 and was of course a "claims made" policy: the insurers declined to extend an indemnity because the claim was first made on 17^th May 2001, prior to inception of the policy, and, in any event, should have been but was not disclosed in the proposal.
40. In the result, Mr Herrington had to instruct and pay for legal representation for the firm. The action was eventually listed for a 9 day trial commencing in December 2006. At a mediation held on 3^rd November 2006 Mr Herrington decided that the firm would be well advised to settle the claim out of court and a sum of £185,000 inclusive of third party costs was agreed; the defence costs amounted to another £40,000.
41. Mr Herrington claims these expenses are partnership debts. Mr Tann disputes this. He contends that Mr Herrington acted in breach of his duties of good faith and of care to him in failing to notify him of the existence of the dispute with and claim from the Carters and to give prompt notice to the insurers of the making of the claim; therefore he argues that Mr Herrington must bear the whole of these losses himself.
42. Mr Herrington accepts in hindsight that he was wrong not to have notified his insurers. He argues that his failure to do so was far from unreasonable, because the claim in the Letter of Claim was put in such generalised terms as to be impossible to consider or answer as described, and because Myers Lister Price stated categorically that they would shortly be sending details of a proposed independent building expert who could prepare a report on a joint basis. Mr Herrington therefore reckoned that his insurers would not be able to make much of a claim until the promised expert's report arrived. In short, he did not inform his insurers on risk in the years 2001 to 2004 because the nature of the claim was entirely unclear and he was reasonably expecting an expert's report to substantiate it.

The duties of a partner to his firm:

43. Under the heading "Rules as to interests and duties of partners subject to special agreement" section 24 of the Partnership Act 1890 sets out the duties of partners as follows:

"The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules:

(1) .....

(2) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him -

(a) in the ordinary and proper conduct of the business of the firm; or

(b) in or about anything necessarily done for the preservation of the business or property of the firm."

44. By section 28 of the Partnership Act 1890 each partner was "bound to render... full information of all things affecting the partnership to any partner...".
45. It is significant that the rule in section 24 is "subject to any agreement express or implied". Section 19 of the Act also provides that "the mutual rights and duties of partners ... may be varied by consent of all the partners, and such consent may be either express or inferred by a course of dealing." The possibility that a term to the contrary of those in section 24 might be implied using ordinary contractual rules has been little discussed in the authorities.^[2]
46. In so far as they were express, the Partnership Agreement provided by clause 10 for the following additional duties as follows:

"EACH PARTNER SHALL AT ALL TIMES:

A. Devote the whole of his time and attention to the firm's business and diligently and faithfully employ himself therein and carry on the same for the greatest advantage of the firm ...

B. Be just and faithful to the other Partner in all transactions relating to the business of the partnership and shall give a true account of the same to him when and so often as the same shall be reasonably required and shall upon every reasonable request inform the other Partner or Partners of all letters accounts writings and other things which shall come to his hands or knowledge concerning the firm's business."

47. The leading textbook, Lindley & Banks on Partnership (18^th Edn, 2002 at para 20-09), states that in order to justify a departure from the general rule set out in section 24 of the Act "some element of culpability must be shown on the part of the partner responsible". As Lord Lindley explained:

"Even if a loss sustained by a firm is imputable to the conduct of one partner more than to that of another, still, if the former acted bona fide and with a view to the benefit of the firm, and without any culpable negligence [vis a vis his co-partners], the loss must be borne equally by all."

48. The above principle is not in dispute. What is in dispute is the nature and extent of the "element of culpability" which is required and what exactly amounts to "culpable negligence".
49. Miss Amanda Tipples, who acted for Mr Tann, argued that the partners owed each other a duty to exercise reasonable care and skill in respect of the partnership and, in particular, a duty not to expose the partnership to any avoidable liabilities.
50. This is denied by Mr Herrington. Mr Blackett-Ord for Mr Herrington puts his argument in the following propositions:

a. Save in the case of specific agreement or a special fiduciary obligation beyond ordinary partnership obligations, a partner loses his right of indemnity from his firm only if he is in breach of his duty to his firm as described below.

b. His duty to his firm is a duty (i) of good faith and (ii) not to commit "culpable or gross negligence".

c. "Culpable" or "gross" negligence (the terms seem interchangeable) is something more serious than ordinary negligence: the difference is not qualitative but one of degree.

d. To put the matter the other way round, a partner's level of care towards his fellow partners is not as high as his ordinary duty of care to a client; it is an obligation to take such a level of care as he would take in relation to his own affairs.

e. Mr Herrington's duty to Mr Tann was accordingly to take such a level of care in relation to insurance matters as he would in relation to his own such affairs.

f. Mr Herrington's personal liability as a consequence of the insurance muddle in this case was that he bore over half of its cost. This is some evidence that in relation to the matter he exercised neither a higher nor lower level of care than he exercised in relation to his own affairs.

51. My attention has been drawn to a number of cases dealing with the nature, scope and standard of the duty of care in question. I do not propose to refer to them all in detail. There are surprisingly few of them but most were considered by the Law Commission and referred to in the summary found in their Report on Partnership Law (Law Com No 283), as follows:

11.6 "The 1890 Act contains no statement of the duty of care which a partner owes to the partnership. There is uncertainty in both jurisdictions^[3] as to the standard of care which is imposed on a partner.

11.7 Historically, in English law a partner's duty to the partnership was to act without "culpable" negligence. In the older authorities the nature and extent of the duty owed by one partner to another was not closely explored, and various expressions are found. [There are references in older English cases to a partner's "want of reasonable care" (Thomas v Atherton (1878) 10 Ch D 185 at 202) and to a partner being "guilty of negligence" (McIlreath v Margetson (1785) 4 Doug 278, 279)] More recently, Woolf J. referred to the duty of a partner to act "without culpable negligence" but also stated that the partner was "required not to act below the standards of a reasonable business man in the situation in which he found himself. The latter formulation suggests an objective standard of care. Similarly in the New Zealand case of Gallagher v Schulz [(1988) 2 NZBLC 103] the court required a property valuer who entered into partnership with a passive investor to develop the latter's property, to attain an objective reasonable standard of skill and care. Williamson, J. held that the property valuer should show the skill and care which would be expected from a prudent valuer and experienced property developer.

11.8 ....

11.9 ....

11.10 There thus remains considerable uncertainty as to the circumstances in which partners owe a duty of care to their partners and the partnership and as to the standard of skill and care which the law imposes in the absence of an express contractual statement."

52. In M'Ilreath v Margetson (1785) 4 Dougl 279, one of two joint agents, engaged in paying prize money to sailors, paid £385, 2s of it to sundry persons who impersonated the sailors and then had to pay the same money again to those entitled to be paid. It was held that the innocent partner was not liable to contribute his proportion to the money paid by mistake. Lord Mansfield observed:

"The defendant has been guilty of negligence, and as between him and the plaintiff the latter is not liable. It is of great consequence to the public that the rule should be strictly preserved. With regard to the third persons, the plaintiff and defendant are both liable."

53. I am going to mention Wilson v Brett (1843) 11 M&W 113 to which I was referred for the observation of Rolfe, B. at page 115 that he:

".. .could see no difference between negligence and gross negligence - that it was the same thing, with the addition of a vituperative epithet; and I intended to leave it to the jury to say whether the defendant, being, as appeared by the evidence, a person accustomed to the management of horses, was guilty of culpable negligence."

54. The case was not a partnership case; it concerned the owner of a horse who was suing the defendant for damages for negligence. The defendant had ridden the horse gratuitously at the owner's request for the purpose of showing him for sale to a Mr Margetson who was playing cricket at East Surrey Race Ground; the horse slipped several times and fell, suffering a broken leg. What is interesting in the context was Rolfe, B.'s direction to the jury: he left it to the jury:

"... to say whether the nature of the ground was such as to render it a matter of culpable negligence in the defendant to ride the horse there; and told them, that under the circumstances, the defendant, being shewn to be a person skilled in the management of horses, was bound to take as much care of the horse as if he had borrowed it; and that, if they thought the defendant had been negligent in going upon the ground where the injury was done, or had ridden the horse carelessly there, they ought to find for the plaintiff."

55. On a motion for a new trial on the grounds of misdirection, it was submitted that "that which would amount to proof of negligence in a borrower, would not be sufficient to charge the defendant, and that he could be liable only for gross or culpable negligence". Parke B. responded to the argument by saying that:

"... the defendant was shewn to be a person conversant with horses, and was therefore bound to use such care and skill as a person conversant with horses might reasonably be expected to use: if he did not he was guilty of negligence."

56. As I have indicated, this case was not a partnership case: however, it is interesting for two reasons. First it shows how Rolfe, B. used the terms "culpable negligence" and "negligence" in his direction to the jury interchangeably. Secondly, it shows that a person with special skill was expected to show that degree of "skill and care" that he "might reasonably be expected" to show - that is to say, (i) the higher the skill he possessed, the greater the skill he was required to show and (ii) that it was an objective, not a subjective, test that the jury was to apply.
57. Thomas v Atherton (1878) 10 Ch at 185 was a case where the managing partner of a colliery, in neglect of a specific warning and without proper enquiry, had carried out workings beyond his boundary and exposed the partnership to a liability in substantial damages to an adjoining owner. The Court of Appeal was of the view that he had acted with gross negligence and recklessness in continuing his working after notice and rejected his suit for a contribution from his innocent partners.

"... nothing could be more rash or reckless than to take all the risk of disregarding those plans on the chance of establishing a construction of the letterpress against the plans, the utmost profit being so trifling and the loss risked so great. It was a speculation which no partner had a right to involve his co-partners in without their full knowledge and concurrence."

58. Winsor v Schroeder (1979) NLJ 1266 was a case where two partners owned equal shares in a property which they were going to renovate and sell at a profit. However, the market began to fall: one partner, W. was "a businessman who had in the past been involved in property transactions", chose not to accept a recommendation from a reputable agent to sell the property at £36,000 but withdrew it from the market. The market fell further and the property later sold for only £30,000. W. claimed a contribution towards the loss sustained by the fall in value of the property. He failed. Woolf J. held that there had been a breach of duty by W. in withdrawing the property from the market instead of accepting the offer; he owed his partner a duty of good faith and to act honestly and in the interest of both himself and her:

"... without culpable negligence. W's rejection of the offer had been much more than an error of judgment. W was required not to act below the standards of a reasonable businessman in the situation in which he found himself. He acted wholly out of accord with the standard."

Discussion;

59. It is, I suppose, not entirely surprising that the cases prior to the Partnership Act 1890 did not analyse the nature, foundation and scope of the duties which one partner owed to the other. The Act itself was a codifying Act and did not affect the preceding rules of the common law and equity which continued in force except where inconsistent with the provisions of the Act. What is of some surprise is how few cases there have been in this jurisdiction since 1890 in which these issues have been discussed and determined.
60. Such cases as there are deal with a variety of situations where sole liability of the guilty partner is alleged, sometimes successfully, to arise. In some cases the issue is whether the liability of one partner to a third party involves such a degree of default as to amount to a breach of duty to the firm such that he must bear the liability on his own (this was the position in Thomas v Atherton: where the managing partner was reckless, though the case does not decide whether a lesser degree of default would have sufficed); in others, the issue is whether the incurring of loss to the firm through incompetent performance of business transactions involving partnership property is of such a character that the partner must bear it on his own (as was the case in M'Ilreath v Margetson and Winsor v Schroeder); there is a possible third category (of which the instant case is an example) where, the question is whether the administration of its own internal affairs (the performance of which is entrusted by the firm to one partner to look after on behalf of all the partners) is something which attracts a duty, such that the partner in breach must sustain the loss on his own. To my mind it is quite important that these different categories should be kept separate because it may well not follow that the standard of skill and care as between partners in the different circumstances thrown up in these different categories of case will be identical from one category of case to the other.
61. In particular, where the alleged default of the partner has caused the firm to be liable to a third party, we are concerned with a different category from that with which the instant case is concerned. In Lane v Bushby (supra) and Macalister Todd Phillips Bodkins (supra), both of which concerned firms of solicitors, the courts rejected arguments that there should be implied into the partnership agreement a term imposing a duty to the firm to exercise reasonable care. In each case the guilty partner had incurred a liability in simple negligence to a client of the firm. In Macalister, giving the judgment of the majority^[4], Blanchard J. observed:

"[15] .....An acknowledgement that individual partners need not bear the full cost of any negligence in their conduct of the professional services of the firm may be found in the express terms of a partnership agreement. Or it may be implicit in the partnership arrangements, and discernible particularly in the contract the partnership makes with its insurers for professional liability insurance.

[16] It is therefore necessary in a given case to determine whether a partner who has by his or her negligence created a liability claimable against the partnership is to be regarded as having acted in breach of duty to the other partners in the particular instance, and so must exclusively bear the loss, or whether, as we think has long been the case in modern professional partnerships, partner negligence leading to a claim by a client is regarded as an unfortunate but accepted fact of life, since even the best of professionals may have an occasional lapse, and is handled by appropriate insurance arrangements protecting all the partners, including any who may be guilty of negligence."

The court in each case adopted the standard set out in Thomas v Atherton.

62. In the Scottish case of Ross Harper & Murphy v Banks [2000] SLT 699 Lord Hamilton in the Outer House also had to consider whether a default by a solicitor to a client was such as to constitute a breach of duty to his firm. After considering the authorities he said (at page 705E):

"The existence, in the absence of provision to the contrary, of such a duty [sc. of care] is not, in my view, inconsistent with the terms of the Partnership Act nor of any established rule of common law. The more difficult and uncertain question is whether breach of that duty will occur by "mere" or "ordinary" negligence or only where something more ("gross negligence" or "recklessness" or the like) occasions the loss. In the absence of clear and binding authority I favour a standard which requires the exercise of reasonable care in all the relevant circumstances. Those circumstances will include recognition that the relationship is one of partnership (which may import some mutual tolerance of error), the nature of the particular business conducted by that partnership ... and any practices adopted by that partnership in the conduct of that business."

The case went to appeal and it is said that the pursuers withdrew their claim before the hearing was complete after the judges in the Extra Division had expressed dissatisfaction with the idea that partners, in the absence of express stipulation, should owe each other duties of care in relation to loss incurred by the partnership as a result of claims by clients for professional negligence. As a result the Inner House issued no opinions.

63. In relation to duties where the issue does not involve the "guilty" partner incurring liabilities to a client or other third party, there are few cases, most of them pre-Act. Although there is not in those pre-Act cases much discussion about the basis of liability, the courts have not hesitated to find that the firm and its innocent partners are entitled to an indemnity from the guilty partner. Such cases include Re Webb (1818) 8 Taunt 443 where a partner mistakenly paid the owners for the value of goods, destroyed in a warehouse fire for which loss the firm was not liable; and M'Ilreath v Margetson (discussed at paragraph 52 above).
64. There do not appear to be any cases where the loss has involved a partner whose default occurred in the management of the firm's administrative affairs (unless M'Ilreath is considered to fall into that category). This appears to be the only case where the default is by a partner entrusted with the responsibility of protecting the firm by complying with the insuring provisions in a professional indemnity policy of insurance. I favour the notion that the firm entrusts such a partner with a responsibility greater than that of not misdirecting partnership funds and that it expects him to perform the duty with all reasonable care and skill. If the provision of professional indemnity insurance is truly to be regarded as a consideration which negatives the implication of an implied term of reasonable care in third party cases (as in Macalister), I should have thought that the corollary was a countervailing duty on the partner administering the professional indemnity scheme to ensure that he did so with a requisite degree of skill and care.
65. What it seems to me that one also does find in the cases is a distinction between "skill" as contrasted with "care". As regards "skill", we have seen how the judges in Winsor v Schroeder and Gallagher v Schulz had no difficulty in concluding that a partner who was taken into partnership because he was possessed of a skill or calling should be under an obligation to the firm to exercise the skill or calling that he possessed or held himself out as having. The concept that in the realm of negligence a person could be expected to use that degree of skill that he either had or held himself out to the other as having was one that was well known and accepted in pre-Partnership Act times, as we can see from Wilson v Brett (admittedly not a partnership case). For my part, I see no reason why this should not be so.
66. Mr Blackett-Ord argues that a partner's duty to the firm is "to take such a level of care as he would take in relation to his own affairs"^[5]. It is notable that the standard of care for which he argues is said to be a lower standard than a duty to take reasonable care and this appears to be reflected in some cases; thus, he says, a partner is liable to the firm only for "culpable" or "gross" negligence and that the test is a subjective test. In the result Mr Blackett-Ord is able to argue that, since Mr Herrington bears in any event a 55 per cent share of any losses occurring as a result of his defective performance of his duty, he was in a very real sense making a business decision in relation to reporting the claim which had a direct bearing in relation to his own affairs; he therefore cannot be said to have been in breach of a duty to exercise such care as he would in his own affairs; these were his own affairs and the care he exercised was a demonstration of the level of care he exercised in relation to them.
67. I am not attracted by Mr Blackett-Ord's argument. It seems to me that there is in any event an imprecision about the duty "to take such a level of care as he would take in relation to his own affairs". Care that he would take may be very different from care that he did take. And it is equally possible, indeed in my view more likely, that the firm would expect each partner to do his best, at the very least, in relation to the reporting of claims. In this connection, in the writings of Erskine -Institute, III iii 21 - I note that it is stated that:

"If,..., a partner should fall into error in management, for want of a larger share of prudence or skill than he was truly master of, he is not answerable for the consequences. He did his best; and the other partners have themselves to blame that they did not make choice of a partner of greater abilities." [Emphasis supplied.]

68. Apart from which, I am not persuaded that at the time this formulation of the duty was articulated, the duty was necessarily contemplated to be a significantly lower standard of care. It is quite possible, it seems to me, that partners prior to the Partnership Act 1890 will have expected their colleagues to exercise what they regarded as the same [high] duty as they would exercise as a matter of pure self-interest in relation to their own personal affairs, and that they would in any event "do their best".
69. As regards the standard of skill and care, I note that in both Winsor and Gallagher the judges applied an objective test, and this was applied also in Wilson v Brett. I am not persuaded by Mr Blackett-Ord that I should not follow the principles set out in these authorities.

Findings and Conclusion;

70. In the instant case, Mr Herrington was the senior partner in years and experience and was content to take responsibility for the handing of the firm's business matters in general and professional indemnity insurance matters in particular. There is some, but very little, skill involved in understanding how such insurance works. It can be taken that such knowledge and skill as was necessary had been acquired over the 10 years or so that he had handled insurance matters.
71. He says that on one previous occasion in 1996 he had made a report of a claim made against the firm rather later than he should have done, that is to say in December 1996 at the time of renewal rather than August 1996 when the letter of claim had arrived. On that occasion the insurer accepted the claim. He therefore thought he had an established convention to act as he was doing. I reject this evidence. I do not accept either that the correspondence gave grounds for thinking that a convention to ignore the terms of the policy had been impliedly blessed by insurers or even that Mr Herrington believed that to be the case either.
72. In his Defence Mr Herrington pleaded that the reason he delayed notification was because he needed to await an expert's report before he could understand the claim. In his evidence he said that the reason he delayed was that the first question the insurers would ask is how much the claim was worth and he was waiting to receive the report which Myers Lister Price had intimated in order to be able to answer that question and until then he could not see what the detail of the claim was. I reject that explanation and do not believe it to be a true account. In my judgment he decided not to notify because he believed the claim was "spurious" (as he stated in his letter of response to the Letter of Claim) or a "dinner party claim" (as he stated in his evidence to me) and that it was his view that at the end of the day if he ignored it, it might well go away and not be pursued; in addition to which, the surveyor who had dealt with the Carters was Mr Robertson, who at that time he was seeking to introduce into the partnership.
73. It is clear that Mr Herrington knew that failing to send the Letter of Claim to insurers ultimately could enable them to avoid indemnifying the firm. It was, he acknowledged, a mistake - a serious mistake - in hindsight, "but not reckless. At the time, I thought I was acting in the best interest of the firm".
74. As I have indicated earlier, in my judgment Mr Herrington owed to the firm a duty to exercise reasonable care and skill, a duty which required compliance to an objective standard. It is plain that, if I am correct in finding that to be the duty, Mr Herrington was in breach.
75. If I am wrong about this, and the duty is as Mr Blackett-Ord set out in the formulation which I have quoted at paragraph 50c above, then I am also quite satisfied that Mr Herrington was in breach of duty, whether it was a duty to do his best (I do not believe even he thinks that he did) or to act to the standard he would apply in looking after his affairs. I make this finding with some confidence having seen him give evidence and in the light of certain answers to me including the following.
76. As he came towards the end of his evidence, I asked him what his reaction would be in the following hypothetical situation: he was to suppose that he had been involved in a road traffic accident where he was quite satisfied that he was not to blame; a short while later the guilty driver sent a letter of claim, claiming damages for negligence on the basis that Mr Herrington had been responsible for the accident and promising to send a medical report detailing his injuries. Mr Herrington immediately answered that in such a situation he would refer the Letter of Claim immediately to insurers. He regarded the situation as different from that in the present case in that he would not know in the hypothetical example whether the other driver was injured or not, nor how matters were going to proceed. "And" he added, "I could not take the risk".
77. The conclusion to which I have come is that, if the standards in accordance with which Mr Herrington acted in relation to his personal affairs were lower than the exercise of reasonable care, Mr Herrington was in breach even of those. Or to put it another way, in my judgment his failure to report the claim to insurers was "culpable or gross negligence".
78. It follows in my judgment that the loss which the firm sustained in relation to its liability to the Carters and for the costs of defending the firm against that claim, are losses and costs a share of which Mr Herrington is not entitled to recover from Mr Tann.
79. Finally, I should deal briefly with the submission of Miss Tipples that Mr Herrington was also in breach of his duty of good faith; it is of course the case that the duty of good faith continues after the departure of Mr Tann until the partnership is fully wound up. She argues that compliance with that duty obliged Mr Herrington to report to Mr Tann the claim that had been made against the firm by the Carters. Mr Herrington acknowledged that he owed a duty of good faith but did not accept that it imposed a duty to provide all information in a case where Mr Tann left it to Mr Herrington to look after the administration of insurance matters; moreover he did not realize that he still owed such a duty after Mr Tann had left; the Letter of Claim arrived just one and a half months after his departure.
80. It is correct that I should have regard to the way in which the firm reposed matters of administration in the hands of Mr Herrington and in so far as the duty of good faith included an obligation to keep Mr Tann informed the duty was tempered by that practice, as well as by clause 10 of the Partnership Agreement (see at paragraph 46 above). For that reason I am not persuaded that there was any breach by non-disclosure during the acrimonious correspondence between Mr Carter and the firm preceding the Letter of Claim.
81. However, in my judgment the Letter of Claim was materially different, as was the decision of Mr Herrington not to report the claim to insurers. In my judgment it was the duty of Mr Herrington in pursuance of his duty of good faith to report these two facts to Mr Tann.
82. Mr Blackett-Ord argued that, even had due information been given to Mr Tann, the loss would have been sustained in the same way because even Mr Tann would not have taken any steps to secure that the claim was notified to insurers. I do not accept this. Mr Tann told me that he would certainly have insisted that the Claim be reported to insurers, an assertion which I accept not simply because he said it (of course he would, wouldn't he?) but because he struck me as a different sort of character, more literal and pedestrian in a way than his partner who, I recollect, rather inappropriately dismissed out of hand the criticisms made by the Carters of his firm's efforts as mere "dinner party claims".

Note 1   See at paragraph 21 infra.    [Back]

Note 2   Notable exceptions being the cases of Lane v Bushby [2000] NSWSC 1029 and Macalister Todd Phillips Bodkins v AMP General Insurance Ltd [2006] NZSC 105.    [Back]

Note 3   i.e. Scotland, and England and Wales.    [Back]

Note 4   Elias CJ, Blanchard, Tipping and McGrath JJ.    [Back]

Note 5    A formulation which I note comes verbatim from the text of the Institutes of Justinian at III xxv 9 in the translation of Professor Thomas (1975) - as referred to by Lord Hamilton in Ross Harper & Murphy v Banks ibid, at page 702L.    [Back]