England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/08/2011

The Chancellor :

Introduction
1. The parties, Mr Boghani and Mr Nathoo, carried on the business of hotel development in the name Splendid Hotel Group as partners at will from 1993 until 8th April 2011. On the latter date the partnership ("the Firm") was dissolved pursuant to a notice given by Mr Boghani to Mr Nathoo on 1st April 2011. At the date of dissolution the assets of the Firm included two very substantial but uncompleted hotel developments, called respectively the ICH Development and the Hilton Development, to which I shall refer in some detail later. The partners have been unable to agree how those developments should be disposed of in the winding up of the affairs of the Firm. Mr Boghani contends that they should be sold now, following a three month marketing campaign, to the highest bidder on certain terms which include the ability of each partner to bid. Mr Nathoo disagrees. He maintains that the developments should be completed and then sold on similar terms. Each of them now seeks an order of this court giving effect to his suggestion.
2. Fundamental to this disagreement is the proper construction and application of s.38 Partnership Act 1890. That section, so far as material provides:

"After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise."

Mr Nathoo contends that that section obliges the Firm to continue the developments unless and until the court in its discretion determines otherwise under s.39. Mr Boghani disagrees. He submits that before dissolution the Firm was under no unconditional obligation to complete the developments. In addition he suggests that it is not necessary that the Firm should do so for the purposes of winding up its affairs. In any event, he submits that the court should in the exercise of its discretion order a sale on the terms he proposes.

3. Accordingly the issues which arise are:

(1) whether (a) the Firm was obliged before dissolution supervened to complete each development and/or (b) whether such developments are transactions begun but unfinished at the time of dissolution; and if so

(2) whether in order to wind up the affairs of the Firm it is necessary to perform those obligations or complete such transactions; and if so

(3) whether the court in the exercise of its discretion under s.39 should nevertheless order the sale of such developments before their completion.

I will consider those issues in due course but first it is necessary to set out the facts and to describe the developments in a good deal more detail.

The Facts
4. Both parties are members of the Ismaili community. Each was born in the early 1950s. Mr Boghani is a chartered accountant. Mr Nathoo a businessman. They have been very successful. The developments with which I am concerned were acquired in 2005 and 2006 following earlier ventures on a smaller scale. Their relationship deteriorated in the autumn of 2007 and discussions concerning the disposal of assets and a dissolution took place then. The business of the Firm nevertheless continued. The agreement for the ICH development ("the Hotel Management Agreement") was concluded between the Firm (1) and Intercontinental Hotels Group (Management Services) Ltd (2) on 17th February 2009. The agreement for the Hilton Development ("the Management Agreement") made between the Firm and Hilton UK Manage Ltd was executed by the parties on 29th January 2010.
5. On 30th November 2010 most of the other hotels owned by the Firm were sold to Mr Nathoo for £183m. Notice to dissolve the Firm with effect from 8th April 2011 was served by Mr Boghani on Mr Nathoo on 1st April 2011. The circumstances giving rise to that event are hotly disputed. It is not only unnecessary for me to reach any conclusion on any of those events but it would be unhelpful for me even to try to do so lest I prejudice the co-operation of the parties in implementing whatever order I decide to make. On 20th April 2011 Mr Boghani instituted proceedings in order to establish, if necessary, that the partnership had been dissolved and to obtain, so far as necessary, an order to wind up its affairs.
6. The applications now before me were commenced by notice given by Mr Boghani on 14th June and by Mr Nathoo on 20th June. The former seeks a direction that the Hilton and ICH developments should be put up for sale on the open market with a view to obtaining the best price reasonably obtainable over a three months period. The direction sought by the latter is to the effect that s.38 Partnership Act 1890 obliges the partners to complete both developments first and then sell on the open market with a marketing period of 6 months. It is unnecessary to refer to their respective witness statements in support of the rival applications because they dwell on the disputed past.
7. The applications came before Henderson J on 24th June 2011. He directed that expert evidence of market value of each development on the basis of (a) its current incomplete condition and (b) when complete be obtained from Mr Hossack of Colliers International UK plc. In addition the parties were jointly to commission Mr Bartrop of CB Richard Ellis Hotels Ltd for advice as to the appropriate marketing period for the sale of each development in its current incomplete condition and following completion. Those reports were produced by the respective experts on 8th and 19th July respectively. I shall refer to the relevant parts of them in relation to each development in due course. Further evidence has been served by each party since then but primarily in relation to their disputes as to the past rather than what is best to be done in the future.
The ICH Development
8. As I have already indicated the ICH Development land was acquired in January 2006. It consisted of a substantial former hospital building erected in the 1930s later converted to office and retail use. Planning permission for a change of use to provide a hotel comprising 304 rooms was obtained in October 2007. It is intended to convert it into a luxury five star hotel. The development is subject to a number of material contracts, namely:

(1) The Hotel Management Agreement dated 17th February 2009;

(2) A design and build contract between the Partnership (1) and Broadoak Construction (South East) Ltd (2) dated 16th June 2010;

(3) A secured credit facility with Bank of China Ltd dated 22nd April 2010; and

(4) Various contracts for consultancy services.

9. By the Hotel Management Agreement the Firm, defined as the Owner, is obliged to deliver to the other party, defined as the Operator, a fully completed/renovated and fully operational hotel fit for public occupancy on or before 31st December 2011, later extended by consent to 1st June 2012 (clauses 1.3 and 4.4(a)(ii)). Clause 20 contains a number of provisions relating to the assignment of the benefit of the agreement. Clause 20.1 confers a right to assign the benefit to an affiliate, as defined in Exhibit A. Either partner would be an affiliate of the Firm. Clause 20.2(b) confers on the Firm as the owner, subject to conditions, the right with the consent of the operator to sell or lease the hotel to a third party. The consent of the operator is not to be withheld in the case of a buyer of a specified description who is prepared to enter into an appropriate agreement with the operator adopting the Hotel Management Agreement. In summary, in the case of a sale of the development to one of the partners or to a third party buyer of the appropriate description willing to adopt the Hotel Management Agreement the obligations of the Firm are determinable before the agreement has been fully performed.
10. The Design and Build Contract made on 16th June 2010 between the Firm and Broadoak Construction (South East) Ltd obliges the latter to design, construct and convert the buildings for the Firm in consideration of the payment of the total sum of £32m odd. There is no restriction on the ability of the Firm to assign the benefit of that agreement. On 22nd July 2011 Broadoak wrote to the Firm expressing its concern at what it considered to be a substantial shortfall on its account with the Firm. In the event of a sale of the development before completion a release or novation of the Firm's obligations would have to be negotiated. The same is true of the various contracts for consultancy services referred to in paragraph 8(4) above.
11. The original facility with Bank of China was made on 22nd April 2010. There was a meeting between the partners and that bank on 24th February 2011 regarding the operation of that facility. On 6th June 2011 Bank of China wrote formally to the Firm highlighting what it contended were events of default concerning the operation of the facility. The bank wrote again on 13th July 2010 setting out a number of conditions for the continued operation of the facility including further deposits with the bank of £30m. The bank required acceptance of the conditions by 20th July 2011. Each partner communicated his consent to the bank's terms on 20th July 2011 as requested. Counsel for Mr Boghani produced in the course of the hearing an email from Barclays indicating that Mr Boghani had £15m with that bank, the implication being that he could comply with his part of the obligation to provide a £30m deposit with Bank of China. Mr Nathoo was challenged to do likewise.
12. Mr Hossack, who inspected the ICH Development on 30th June, described the state of the development in his report as being in "a shell like condition with most of the demolition works completed and much of the basic infrastructure now in place, including many of the bedrooms". His conclusions based on the information specified in his report are as follows:

Costs to date	£16.9m
Costs to complete	£34.7m
Value on completion	£152m
Present value	£79m

Neither party has criticised Mr Hossack's data, methods or conclusions. Accordingly it is unnecessary to give any more details.

13. The evidence of Mr Paul Bartrop indicates that at present there is a high level of demand for any hotel assets in London. He states that, assuming market conditions remain unchanged, there should be widespread interest in the ICH Development. He would expect a competitive bidding process if this development were brought to market. Given the benefit of unfettered open marketing and realistic pricing a preferred bidder should have been selected within three months of the launch of the marketing campaign whether or not the development had been completed.
The Hilton Development
14. The site of the Hilton Development was acquired by the Firm in 2005. It is a brownfield site in Southwark comprising 0.84 acres. The site was occupied for a variety of uses in the past, including residential, retail, light industry, a school and a factory. It is now cleared of buildings. Planning permission has been obtained for the construction and use of a 281 room hotel. Development work commenced in August 2010 but stopped on 1st May 2011. The intention is to develop a four star core brand Hilton Hotel.
15. The development is subject to a number of contracts, namely:

(1) The Management Agreement;

(2) A project management agreement with Jones Lang Lasalle dated 2nd December 2009;

(3) Letters of Intent dated 6th and 30th July, 1st October 2010, 11th February, 15th and 29th March 2011 between the partnership and various contractors.

(4) Heads of Terms dated 15th December 2010 recording agreement in principle for a loan facility from HSBC.

16. The Management Agreement requires the Firm with all reasonable diligence to commence and complete the construction, furnishing, equipping, fitting out and decorating the hotel in accordance with its detailed provisions. That process is to be completed within 30 months of the start. The best estimate of the expected completion date, originally intended to be 1st June 2012, is now sometime between February and July 2013. Following the completion of the hotel the Management Agreement provides for Hilton UK Manage Ltd to manage it for a period of twenty years thereafter. Clause 16 contains detailed provisions as to the assignment of the interest of the Firm in the development and hotel. The effect is that provided the assignee is not a prohibited person, as defined, the Firm may assign its interest to one or other partner or to a third party if the purchaser enters into a covenant with the Manager to perform and observe all the obligations of the owner under that and certain other documents.
17. The terms of the various agreements and documents referred to in paragraph 15 (2) above are similar to the equivalent documents in the case of the ICH Development. The requisite finance is to be provided by HSBC in accordance with the Heads of Terms referred to in paragraph 15(4) above but there is no facility agreement and none has been provided to date.
18. Mr Hossack's valuation gives the following figures for the Hilton Development:

Costs to date	£5.6m
Costs to complete	£47.1m
Value on completion	£110m
Present value	£34m

The conclusions of Mr Bartrop on marketing are the same in the case of the Hilton Development as they are for the ICH Development (see paragraph 13 above).

S.38 Partnership Act 1890
19. I have set out the text of the section in paragraph 2 above. In addition I was referred to a number of authorities on the common law principle applied before its enactment as well as on its application since then. In chronological order they are Crawshay v Maule (1818) 1 Swanst. 495, Re Bourne [1906] 2 Ch 427, Inland Revenue v Graham's Trustees [1971] SLT 46, Don King Productions Inc. v Warren [2000] Ch 291 and Duncan v The MFV Marigold PD 145 [2006] SLT 975.
20. In Crawshay v Maule a testator who owned a mining business carried on in leasehold premises bequeathed the sum of £25,000 to another as capital for him to become a partner with the testator's executor in that business "as long as the lease endures". The issue was whether the partnership was at will or for the terms of the lease. Lord Eldon LC held that it was the former. At page 521 he said:

"It has also been insisted that the purchase of leases must be considered as evidence of a contract for the continuance of the concern. Unquestionably partners may so purchase leasehold interests as to imply an agreement to continue the partnership as long as the leases endure, but it is equally certain that there is no general rule that partners purchasing a leasehold interest must be understood to have entered into a contract of partnership commensurate with the duration of the leases. For ordinary purposes a lease is no more than stock in trade, and, as part of the stock may be sold;"

The relevance of that case for present purposes is to confirm the concurrence of the parties that the Firm was a partnership at will notwithstanding the longer term nature of the hotel developments it undertook.

21. In Re Bourne the partnership was dissolved by the death of one of the two partners. The survivor carried on the business using its bank account which was at all times overdrawn. To satisfy the bank the survivor deposited the deeds of partnership properties with the bank as security. The bank sought to rely on this security but were met with the contention that the borrowing had not been incurred for the purpose of winding up the affairs of the partnership. On appeal from the decision of Farwell J to the effect that the bank was entitled to the security Vaughan Williams LJ observed, at page 430, that:

"The real truth of the matter is that, leaving out all questions of legal estate, there is, as between the surviving partner and the representatives of the deceased partner, an overriding duty to wind up the partnership assets and to do such acts as are necessary for that purpose, and if it is necessary for that winding up either to continue the business or borrow money or to sell assets, whether those assets are real or personal, the right and the duty are co-extensive."

This dictum demonstrates that a partner may exercise the power conferred on him by s.38 to borrow money. I do not doubt that he may; the question is whether it is necessary for the purposes of winding up the affairs of the partnership that he should.

22. In Inland Revenue v Graham's Trustees the House of Lords was concerned with the valuation of a farm for purposes of estate duty on the death of the proprietor who was also one of four partners in a Firm to which it had been let. The issue was whether the farm should be valued with vacant possession or as subject to a tenancy. Under Scots law the death of one partner terminated the partnership. The survivors, though they continued the same business, were a different and distinct legal persona. Accordingly, on the death of the proprietor who was also one of the partners the tenancy ceased. It was argued that the operation of s.38 enabled the surviving tenants to continue the lease so that it was still subsisting immediately after the death of the proprietor. This argument failed.
23. At page 48 Lord Reid, having concluded that the partnership and the tenancy came to an end on the death of one of the partners and after quoting the terms of s.38 continued:

"What is meant by transactions begun but unfinished when the partnership was dissolved? If the common law had been clearly settled before 1890, I would interpret this section in light of the earlier law. But it appears that there was then little authority on this matter. So this section should if possible be construed so as to reach a reasonable result. It was argued that "transactions" means bargains. But that would deprive this provision of all content, for it is clear that surviving partners have no right to bind the assets of the dissolved firm by making new bargains or contracts. Their right and duty is to wind up its affairs. In my view this must mean that the surviving partners have the right and duty to complete all unfinished operations necessary to fulfil contacts of the firm which were still in force when the firm was dissolved.

Otherwise the position would be intolerable. Suppose the firm was employed to build a bridge and the bridge was half finished when the firm was dissolved. The surviving partners must be bound to finish the work, for otherwise they could hold the employer to ransom by refusing to proceed unless he made a new contract more favourable to them, and conversely the employer could refuse to allow the work to proceed unless the surviving partners made a new contract more favourable to him. That could not be right."

Lord Guest reached the same conclusion on the ground that the tenancy came to an end. Accordingly there was no transaction begun but not finished at the death of the proprietor.

24. Lord Upjohn noted that in England it is not often that the section is needed to justify completion of contracts because they will be binding on the outgoing partner or his estate under the general law. He added:

"Thus, for example, if a firm contracts to build a bridge, that contract is not affected by its dissolution. The remaining partners and the outgoing or the estate of a deceased partner will normally remain both entitled and jointly and severally liable under the general law to complete the bargain. Section 38 makes it plain that the continuing partners can in doing so bind the ex-partners or their estates. But I can well understand that in Scots law, without giving it any different a construction, it may be necessary to invoke the section more often than under English law because of s.4(2) of the Partnership Act, and the partnership having come to an end as a legal person on dissolution, the contract presumably must come to an end. But, nevertheless, this section makes it plain that the ex-partners will remain entitled and bound to carry out the contracts made in the name of the partnership and must complete all those contracts and other matters which are in medio when the partnership was a going concern. But their rights under s.38 are limited by the provision that they may only do so so far as it may be necessary to wind up the affairs of the partnership and, this is the important passage, to complete transactions begun but unfinished at the time of the dissolution, and this is equally true of course of contracts in English law but, as I have said, it is less likely to be necessary to invoke that section."

25. Don King Productions Inc. v Warren did not concern a prospective transaction but the beneficial ownership of renewals of various management contracts to which a dissolved partnership had been party. The reference to s.38 in paragraph 42 does not impinge on anything I have to decide on these applications but was mentioned by Lord Reed in Duncan v The MRV Marigold PD 145 [2006] SLT 975, 984 para 43. In that case the estate of a former partner sought payment of his share of the partnership assets by reference to accounts drawn up as at his death. In addition the estate of the former partner claimed 5% of the then value of such share for each subsequent year in which the surviving partners had continued to trade with it. The surviving partners contended that the accounts drawn up as at the date of death were not the correct accounts and that allowance should be given in both amounts claimed for the post-death depreciation in value of the assets.
26. The judge, Lord Reed, referred to the speeches of Lord Reed and Lord Upjohn in Inland Revenue v Graham's Trustees. In paragraph 43 he noted the decisions in Re Bourne and Don King Productions Inc. v Warren. He considered that:

"On any view, however, s.38 cannot warrant the continuation of the business for more than a temporary period."

He concluded that it is:

"necessary to examine the facts in order to determine whether a given transaction arose from the conduct of the business of the dissolved partnership by former partners for the purpose of winding up the affairs of the partnership and was "necessary" for that purpose, or whether it was attributable to some other relationship between the partners."

In the result he upheld the position of the defenders.

27. In my view the terms of s.38 as explained in the authorities to which I have referred, in particular Inland Revenue v Graham's Trustees, demonstrate the following propositions:

(1) The obligations of partners to third parties continue notwithstanding the dissolution of the partnership.

(2) In England, if not in Scotland, the satisfaction of those obligations by performance, release or novation or the payment of damages will not usually involve reliance on the terms of s.38.

(3) S.38 does not entitle the surviving partners to engage in new bargains or contracts so as to bind a deceased or former partner.

(4) Even in relation to transactions, not being new bargains or contracts, begun but unfinished at the time of dissolution s.38 applies only if and to the extent that the completion of such transactions is necessary to wind up the affairs of the partnership.

(5) S.38, if applicable, confers a power; it does not impose any additional duty.

I turn then to the issues summarised in paragraph 3 above.

Are the ICH and Hilton Developments unfinished transactions for the purposes of s.38?
28. It is clear that the Firm is contractually bound to third parties by the various agreements to which I have referred. To that extent the obligations of the Firm continue notwithstanding its dissolution. The affairs of the Firm cannot be finally wound up unless and until those obligations are satisfied by performance, release or novation or the payment of damages. As Lord Upjohn pointed out in Inland Revenue v Graham's Trustees it is unnecessary to resort to s.38 for that conclusion. But if and to the extent that it is, then it is equally clear that the existing contractual commitments of the Firm to third parties are "transactions begun but unfinished at the time of the dissolution".
29. But the ability of surviving partners to bind former partners does not extend to new contracts, except, I would think, to the extent to which they are an inevitable part of satisfying the pre-existing contractual obligations of the Firm under a "transaction begun but unfinished at the time of the dissolution". It would be absurd, if, for example, the unfinished bridge builder referred to by Lords Reed and Upjohn in Inland Revenue v Graham's Trustees could not buy more steel girders necessary for its completion. The issue in all such cases is likely to depend on whether it is necessary to do so. That is the second issue summarised in paragraph 3 above.
30. But before I turn to that issue it is appropriate to consider the ability of the Firm to finance the two developments with which I am concerned. It appears that in each case procurement of the requisite financial resources will depend on contracts not made before the dissolution of the Firm. In the case of the ICH Development the events I have described in paragraph 11 above show that the existing facility is not available to complete the development. Even if a new facility might be available it involves further and new post-dissolution contracts. In the case of the Hilton Development, as I have recorded in paragraph 17 above there was no facility sufficient to complete the development at the time of dissolution. In neither case would the new agreement come within the category of being an inevitable consequence of the development agreement. They would be necessary conditions not consequences.
Is it necessary to complete those developments?
31. To some extent the answer to this question depends on what is meant by 'necessary' and 'complete' in the context of s.38. The necessity must arise from the need to wind up the affairs of the partnership. It is not necessary for that purpose that the obligations arising from outstanding transactions must be satisfied by performance of the unfinished transaction. If completion is equivalent to full performance then in many cases it is both impossible, because the partnership does not have the money, and unnecessary, because the third party is prepared to novate the obligation or to compromise the issue.
32. I do not need to reach any conclusion on whether the concept of completion includes compromise. It is sufficient for present purposes to conclude, as I do, that if completion requires full performance of the pre-dissolution obligation it has not been demonstrated on these applications that any such completion is necessary in order to wind up the affairs of the partnership. Both of the principal contracts governing the developments with which I am concerned clearly contemplate that the Firm may assign the benefit of the agreements and novate its obligations if it can find another developer to take its place.
33. The evidence of Mr Bartrop shows the distinct possibility that suitable outside third parties may well be interested in taking over the role of the Firm in these two developments. The evidence of both Mr Boghani and Mr Nathoo suggests that each of them would be too. It follows that it is not necessary in order to wind up the affairs of the Firm that the dissolved Firm should complete these developments even in the unlikely circumstances that it could do so without the need to make new contracts for new banking facilities to enable it to do so.
Conclusion
34. In these circumstances the third question set out in paragraph 3 above does not arise. In his application made on 20th June Mr Nathoo sought an order that

"the Defendant do join with the Claimant in doing all acts and things necessary including entering into all additional obligations and executing all or any additional contracts necessary to facilitate the completion of the Hilton Development and the ICH Development."

I shall not make any such order. It is not warranted by either the terms of s.38 or by the circumstances of this case. If Mr Nathoo and Mr Boghani are to complete those developments together then they must do so on a consensual basis not because compelled by order of the court. If they cannot agree to do so on that basis then they will be free to bid against each other and any outside third party in order to preserve the development for himself alone. Any other conclusion would be inconsistent with the fact that this partnership was at will not for a particular period, still less for the completion of any particular ventures. In these circumstances I dismiss the application of Mr Nathoo.

35. I turn then to the application of Mr Boghani. He seeks a declaration that:

"The former Partners of the Partnership are not subject to any continuing obligation, whether under section 38 of the Partnership Act 1890 or otherwise, to complete the development of… (a) the ICH Development … (b) the Hilton Development".

I shall not make that declaration either as it would be at worst incorrect and at best misleading. As I have pointed out the contractual obligations of the Firm to third parties continue notwithstanding the dissolution of the Firm. This is so both under the general law and as confirmed by the opening words of s.38. Further s.38 only applies to the extent to which it is necessary to complete the developments for the purpose of winding up the affairs of the Firm. For the reasons I have given such necessity has not been shown.

36. The application of Mr Boghani seeks an order for sale substantially in accordance with the advice of Mr Bartrop. I did not understand there to be any dispute as to the terms proposed in paragraphs 3 and 5 to 8 (both inclusive) and 10 and 11. Further I understood that Mr Boghani would undertake to the court to implement those terms both fully and promptly. This leaves the question of whether the sale should be in the hands of the solicitors for Mr Boghani as contemplated in paragraphs 4 and 9 of the order proposed by him. I do not think that that would be appropriate. Without intending any criticism of the solicitors for Mr Boghani, in disputed matters such as this it is better to preserve complete independence from either party. Accordingly the conduct of the sale and retention of the proceeds will be the duty of the solicitors both parties agree or in default of agreement as are nominated by the Master. I give both parties liberty to apply to the Master generally.
37. I see no need now to make any order as to the disposal of the remaining issues in the action. I invite counsel for the parties to agree a form of order to give effect to my conclusions. I will hear further argument on the question of costs.