Scottish Court of Session Decisions

At advising on 2nd March 1972,—

LORD PRESIDENT (Clyde).—This is a reclaiming motion in an action of damages for negligence brought by the Kirkintilloch Equitable Co-operative Society Ltd. The claim arises out of errors in the audited accounts of the society over a series of years set out in the pleadings. The claim is made against seven defenders, who are sued jointly and severally. After a Procedure Roll discussion the Lord Ordinary allowed a proof before answer of the whole case. Against his interlocutor so doing this reclaiming motion has been presented by the fourth, fifth, sixth and seventh defenders, who moved us to dismiss the action against them on the ground that there were no relevant averments of liability on their part. This narrow issue was the only one debated by the parties at the hearing on the reclaiming motion, and it would be unfair in my view for us to deal in any way with any other issues which might arise between the reclaimers and the pursuers in other parts of the controversy between them which were not the subject-matter of the debate before us.

The issue argued before us arose in this way. During the period to which the claim relates the fourth, fifth, sixth and seventh defenders were partners in the firm of chartered accountants of Hardie, Cuthbertson & Co., C.A. The third defender was also a partner of that firm. He was the official auditor of the Kirkintilloch Co-operative Society and was responsible to them for preparing and auditing their accounts in the years in question. This defender used the staff of the accountants' firm to assist him in preparing the accounts, and the audit fee for the work on the accounts was paid by the society to the chartered accountants' firm.

The main question in the reclaiming motion is whether relevant averments have been made against the reclaimers which, if proved, did make them liable jointly and severally along with the third defender in respect of the negligence connected with the preparation and auditing of the society's accounts. Under section 10 of the Partnership Act, 1890, it is provided, inter alia, that "where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, … the firm is liable therefor to the same extent as the partner so acting or omitting to act." The reclaimers maintained before us that this section did not involve them in any liability, since the third defender in preparing and auditing the society's accounts was not acting in the ordinary course of the business of the firm but in his special capacity as an official auditor under the Industrial and Provident Societies Acts. In other words, he was acting as an individual and not as a partner of his firm.

But the pursuers deny this in fact. They make a twofold case, based on both the branches of section 10 of the 1890 Act. In the first place they found on the words "in the ordinary course of the business of the firm," and in the second place they found on the words in the section "with the authority of his co-partners." If either of these two branches is established, that would enable them to invoke section 10 of the Act. So far as the first ground is concerned, there is, in my view, no special mystique in preparing the accounts or auditing the accounts of a co-operative society and the criterion in this part of section 10 of the Partnership Act is whether the preparation or auditing of the accounts was one of the kinds of activities which were in contemplation of the partners when they combined together in partnership. In my view it clearly was. There is nothing whatever in the case to justify us in assuming that the third defender was not acting in the ordinary course of the business of his firm, which was the preparation and auditing of accounts. On the contrary, he clearly was so doing. But apart from this aspect of the case, even if for any reason it could be argued that the third defender was not acting in the ordinary course of the business of the firm, the pursuers expressly found on the alternative branch of section 10 of the Act, when they aver that with the knowledge, consent and authority of the reclaimers he was auditing the accounts in question. The pursuers reinforce this averment by the assertion that in preparing and completing the accounts the staff of the partnership were employed and the remuneration for this work was paid not to the third defender as an individual but to the partnership itself. These averments appear to me clearly to support the general averment already referred to and consequently to warrant an inference of joint and several liability on the partners in respect of the matters in issue in this case.

Several cases were referred to in the course of the hearing, but I agree with the Lord Ordinary that they differ in their circumstances from the present and help but little to solve the problem raised in this case. In my opinion on the whole matter the Lord Ordinary was well entitled to reach the conclusion to which he came on the issue of joint and several liability on the part of the partners of the firm.

[His Lordship then dealt with matters with which this report is not concerned.]

LORD CAMERON .—The question in this reclaiming motion is whether the pursuers' averments against the fourth, fifth, sixth and seventh defenders are relevant to infer joint and several liability with the remaining defenders for loss allegedly caused to the pursuers by the negligence of the first, second and third defenders. No question arises as to the relevancy of the averments made against the first, second and third defenders at this stage, none of whom appeared to contest the Lord Ordinary's decision that there should be a proof before answer in respect of the case made by the pursuers against them.

The circumstances out of which the action arises have already been narrated by your Lordship in the chair and I need not repeat them in detail. The salient facts are that the third to seventh defenders are all chartered accountants. Between the years 1957 and 1967 they carried on business as chartered accountants in partnership under the firm name of Hardie, Cuthbertson & Co. In May 1967 the partnership was dissolved. The third defender was in 1952 appointed auditor of the pursuers, who are a society registered under the Industrial and Provident Societies Act, 1965. He was reappointed yearly thereafter until his resignation from office in February 1967. He acted as such auditor throughout his partnership with the fourth, fifth, sixth and seventh defenders, and it is matter of admission that throughout that period the audit fee was paid by the pursuers to the firm and received by them as a fee due to the firm. The third defender was a qualified or approved auditor in that he was approved by the Treasury under statutory powers as qualified to audit the accounts of such a society as the pursuers.

The action is founded upon section 10 of the Partnership Act, 1890. That section is in the following terms: [His Lordship quoted it.] The pursuers aver that the third defender, while acting as a member of the firm of Hardie, Cuthbertson & Co. in the ordinary course of the business of that firm and with the knowledge, consent and authority of the fourth, fifth, sixth and seventh defenders, was official auditor of the pursuers for many years prior to February 1967 and in particular was auditor when certain accounting errors took place and remained undetected for such a period as to cause the loss and injury of which the pursuers complain.

It is upon these averments that the Lord Ordinary has allowed a proof before answer as to the fourth, fifth, sixth and seventh defenders' alleged vicarious liability for the negligence of their co-partner, the third defender. The pursuers rest their case upon both branches of the alternative grounds of liability set out in section 10. The fourth, fifth, sixth and seventh defenders attack the Lord Ordinary's decision to allow inquiry in respect that on neither ground of liability have the pursuers made a relevant case.

Were it not for certain provisions of the Industrial and Provident Societies Acts I think that the relevancy of the pursuers' averments to attach vicarious liability to the third defender's partners would not be open to doubt. But it is upon a construction of these provisions and the inferences which the reclaimers sought to draw from them that their arguments rested.

Under the Industrial and Provident Societies Act, 1893, as amended by section 2 of the Industrial and Provident Societies (Amendment) Act, 1913, the accounts of such a society as the pursuers require to be audited by "public auditors" selected from a list prepared and approved by the Treasury. This is laid down and provided for by sections 13 and 72 of the Act of 1893. These "public auditors" are now known, since a subsequent Act of 1948, as "approved auditors." The partnership had never been an "approved auditor" in terms of the statutes governing such approval and, in view of the terms of section 20 of the Industrial Assurance and Friendly Societies Act, 1948, which, with a later Act of 1965, the Industrial and Provident Societies Act, was in force throughout the whole life of the partnership, could never have received such approval to act as the pursuers' auditor. Consequently, it was argued, any wrongful act or omission of the third defender could never be said to be the act or omission of that partner acting in the ordinary course of the business of that firm. This was enough to destroy the relevancy of the pursuers' case of vicarious liability founded on the first alternative of section 10 of the Partnership Act.

I am not prepared to accept that argument, attractively put though it was. There is nothing in the Act of 1893 which makes it imperative that the person appointed by the Treasury under section 72 as a "public auditor" must be a natural person. As section 4 (2) of the Partnership Act expressly provides that "in Scotland a firm is a legal person distinct from the partners of whom it is composed," I think that there is no doubt that from 1893 onwards, at least until 1948, a partnership in Scotland could be appointed by the Treasury to the list of "public auditors" for the purposes of the Act of 1893. But it is said that the provisions of section 20 of the Industrial Assurance and Friendly Societies Act, 1948, radically altered the position by imposing new and individual qualifications for appointment as "approved auditors," which effectively prevented this partnership from at any time obtaining such a qualification. The fact that the law may have been again altered and a Scottish partnership put once again in the position which it enjoyed from 1893 to 1948 as a consequence of the coming into force of section 8 (3) of the Friendly and Industrial and Provident Societies Act, 1968, could not affect a partnership which was dissolved in 1967. But even in that period, 1948 to 1968, as is made clear from the terms of section 38 of the Act of 1965, the position was saved "of a person who was an approved auditor for the purposes of the Act of 1893 on 30th June 1948," i.e. the date of the coming into force of the 1948 Act. A similar saving proviso is contained in section 20 (2) (a) of the Act of 1948. Thus it could not be said that auditing the accounts of such a society as the pursuers was something which would not be within the ordinary course of the business of a firm of accountants.

Even between 1948 and 1966, therefore, it could not be said that no partnership in Scotland could act as auditor of a society registered under the Industrial and Provident Societies Acts. In addition, there is nothing in the legislation which prevents, far less expressly prohibits, an individual appointed as an "approved auditor" (since the passage of the Act of 1968 a "qualified auditor") from being in partnership or from being able to carry out an audit of a society's accounts in the ordinary course of the business of the firm of which he is a partner, even if the partnership itself could not receive appointment as an "approved auditor." Suppose a firm in which each and every partner was an approved auditor, could it be said that, merely because the firm itself was not so appointed, none of the auditing activities of the individual partners in respect of societies were performed in the ordinary course of the business of a firm whose professional qualifications and purposes were directed to accounting and auditing activities? I would think not. Yet, if the reclaimers are correct, this must be the consequence, and would be so even if the fees for the audit were charged and received by the firm at the usual professional rates.

In the present case the third defender was admittedly engaged in auditing accounts. The professional business of the firm of which he was a partner was, inter alia, the auditing of accounts for third parties. The third defender possessed not only the normal professional qualification entitling him to practise professionally—and he was so doing in auditing the pursuers' accounts—but also enjoyed a special qualification or appointment which permitted him to audit the accounts of a particular category of client. This merely enlarged the scope of his potential practice but did not alter its nature or character or give him any special professional qualification outside or beyond his normal and necessary professional qualification as a chartered accountant. But it is not said that any special professional qualification was required for appointment as a "qualified" or "approved" auditor, nor did the third defender, so far as the pleadings disclose, devote his whole time to this particular work. In enlarging the scope of his potential clientele the third defender was enlarging the field over which the partnership could operate through the activities of its members, but this did not alter the nature of its business or the profession of the partners.

Reliance was placed by the reclaimers on the cases of New Mining and Exploring Syndicate Ltd. v. Chalmers & Hunter and British Homes Assurance Corporation Ltd. v. Paterson . Neither of these cases helps the reclaimers, in my opinion. The former action was founded upon section 11 (b) of the Partnership Act and was one in which the delinquent partner, a solicitor, embezzled money entrusted to him in his capacity as a company secretary. The money was paid by applicants for shares in the company but embezzled by the defendant, who paid the sums received not into the company's account but into that of his firm and thereafter misappropriated them. The circumstances were thus totally different from those averred here. In the latter case the actings of the plaintiffs demonstrated that they had originally contracted with the defaulting solicitor as an individual and that they continued to do so in the clearest possible way even after to their knowledge he had gone into partnership with another solicitor. In that case Farwell J. said (at p. 411):

"In my opinion, the defendant does not come within the words of the Act, because I do not think that it is open to a third person to assert that the individual with whom he has intentionally contracted as an individual on his several contract, or with whom he has elected to continue a contract as with an individual, was acting in the ordinary course of the business of the firm, or was acting within the scope of his apparent authority."

There is nothing said in this case to suggest, far less to infer, that the pursuers elected to continue their contract as with an individual after the third defender joined the partnership. On the contrary, the pursuers admittedly paid the audit fee, after the partnership was constituted, to the firm, and it is averred that the third defender was assisted in his work as auditor by employees not of his own but of the partnership. I therefore think that the reclaimers' attack on this alternative branch of the pursuers' case against them as vicariously liable for the alleged negligence of the third defender fails.

But the pursuers also found on the alternative ground of liability set out in section 10 of the 1890 Act. The reclaimers argued that, because the partnership could not lawfully become an "approved auditor," the third defender's co-partners could not lawfully authorise him to act as such. But as a partner in the firm the third defender could lawfully do what he did. If his actions were lawful, I do not see on what ground his co-partners could not give him authority so to act. It was for them to say whether they would give that authority, and there is nothing in the language of section 10 of the Partnership Act which limits the capacity of co-partners in this matter, in giving authority to one of their number to perform certain acts or operations, to such acts or operations as might be within the scope of the co-partnery agreement. The words of the section are plain and unqualified: if the authority is given, and certainly where the actions authorised are in themselves within the lawful competence of the partner so authorised, and if the authority is acted upon, and in consequence of a wrongful act or omission in course of carrying out what was authorised, loss or injury is caused to a third party, then in my opinion the conditions are satisfied for the imposition of vicarious liability for the loss or injury so caused upon the partners of the firm. "Authority," as the word is used in section 10, appears to me to be used in the sense of control, direction or knowing approval of the action or actions in question, and the test is factual and objective. I see nothing in the Act which implies that co-partners cannot give authority to one of their number to perform, as a partner, acts which they themselves may not be legally qualified to perform. In my opinion the argument of the reclaimers on this alternative branch of the pursuers' case also fails.

No challenge was made in this reclaiming motion of the relevancy or specification of the pursuers' averments of their alleged loss or of their method of quantification of that loss. In these circumstances, and subject to the variation in the Lord Ordinary's interlocutor in relation to the second defender proposed by your Lordship, I am for adhering to the Lord Ordinary and refusing the reclaiming motion.

LORD JOHNSTON .—I agree with your Lordship in the chair, and there is nothing I can usefully add.