Scottish Court of Session Decisions

[1] The pursuers in this case are a firm of solicitors practising in Aberdeen. They seek payment from the defender, a former partner, of the sum of £11,286.07. After Procedure Roll discussion, Lord McCluskey ordered a proof before answer and the matter came before me for proof.

[2] The first witness for the pursuers was David Morgan, a partner in the firm for 25 years. In 1989 an amalgamation had taken place between the pursuers' then nine partners and the partners of the firm of Lefevre and Co. The defender was a partner in the latter firm along with four others. It was felt that there would be commercial advantages to both firms in such a move. A Minute of Agreement on Amalgamation (No.11/1 of process) was executed. In terms of paragraph 2 thereof the new firm name was to be "James and George Collie incorporating Lefevre & Co". Paragraph 7.3 provided as follows:

[3] With the passage of time there arose disquiet within the firm about the debts mentioned in paragraph 7.3 and also about the performance of the former Lefevre & Co partners. In particular, monies owed to that firm by two of its former partners, Mr Lefevre and Mr Budge, had not been paid. There was a feeling that the 1989 Agreement had to be adjusted as the original basis of the amalgamation was inappropriate. Revision was necessary in respect of the defender's performance and remuneration and in respect of the bad debts. Accordingly, with effect from July 1991 a new Heads of Agreement was entered into (No.11/2 of process) among all the then partners, including the defender. In terms of paragraph 1 thereof the defender was to be demoted to a salaried partner and would no longer bear the risks of loss or the benefits of profit. In 1994 a formal contract of copartnery (No.16/1 of process) was entered into with effect from 1 July 1992 in response to a desire to have a comprehensive document. The period between 1991 and 1996 had been a turbulent period for the firm. A number of partners had left and there had been growing dissatisfaction with the defender as a partner. After meetings, he was finally asked to resign and he left the firm in June 1996. Throughout the period from 1991 to 1996, although partners left, the business was the same. The firm's staff remained throughout. The firm was registered under the Financial Services Act. It was the same firm throughout. It never closed down. Its trading was continuous. The firm remains the same firm even though partners come and go.

[4] Mr Morgan then turned to the financial implications of the amalgamation. This was to be a marriage of finances. Up to date accounts were prepared and these and previous accounts exhibited to both firms. No.11/3 of process were the accounts of Lefevre and Co to September 1989. They were signed as approved by the then partners, including the defender, and by the accountants. Reference was made in the Capital Accounts to the indebtedness to the firm of the former partners Lefevre and Budge as being in total £35,053 as at that time. That indebtedness was carried over to the pursuers on amalgamation and remained on their books. It became clear that adjustment had to be made in respect of unallocated income tax. No.11/4 of process shows the correct adjusted indebtedness as £33,858.21. This was considered by the pursuers as a significant figure which became known as the Lefevre and Budge debt (hereinafter referred to as "the debt"). It was clearly stipulated at amalgamation that "the debt" would be recovered. The matter was raised on many occasions thereafter and concern was expressed about steps for recovery. That task was voluntarily undertaken by the Lefevre and Co partners, including the defender. It was specifically provided for in the Heads of Agreement of 1991 designed to deal with the position of the Lefevre & Co partners. Clause F thereof dealt with "the debt" in these terms:

This was the contract on which the pursuers relied in the present proceedings. Friendly settlement rather than legal action was the preferred course, and remained the preferred option of the Lefevre partners. Any deficit on the certified debt was to be their responsibility, including a total deficit. This was a restatement of the original liability of the former Lefevre partners. In fact, nothing has ever been recovered and the pursuers were now looking to the defender for his one-third share of the debt as adjusted. The spokesman for the three Lefevre & Co partners was one of their number, Mr Rennie. He was asked about recovery on numerous occasions but parried questions. The embarrassment was going on and on as was the firm's mounting overdraft. Mr Rennie was replaced as managing partner by Mr Morgan in 1996. He was summoned by the firm's bankers who went through the firm's debts, including the Lefevre and Budge debt. On 8 August a partners' meeting was called at which Mr Morgan reported that the bank wished a proper appraisal of the prospects of debt recovery. Mr Morgan had told the bank that the prospect regarding the Lefevre and Budge debt was only long term. For that reason it could not be looked at to meet the immediate crisis. It was recommended by Mr Morgan to "write it off" for those purposes. In fact it never was written off and it was always the firm's position that steps should be taken to effect recovery. The Lefevre & Co partners had raised no actions against Lefevre and Budge and were still insisting they would "sort it out". The defender was not present at that meeting nor was he informed of what was discussed.

[5] Mr Morgan was aware that a meeting had taken place in June 1996 with the defender when he was asked to resign. He was given a cheque for £5,000. This had been suggested by Mr Rennie and agreed to. The payment was to enable the defender to live for the immediate future as his employment was terminated with immediate effect. It was an ex gratia payment. There was no question of waiving his liabilities to the firm. It was not related to "the debt". If any question of relieving the defender of that liability had arisen there would have been a full partners' meeting and the decision would have been minuted.

[6] The 1994 Contract of Co-partnery (No.16/1 of process) was at a time when the defender was a salaried partner. Clause Eighth related solely to partnership losses in course of trading. The defender's salary was intact and the losses were borne solely by the equity partners. "The debt" was not a "partnership loss". It had nothing to do with trading.

[7] In cross examination, Mr Morgan denied that the Amalgamation Agreement created a "new firm". It was simply all the partners of Lefevre & Co becoming partners in Collies. It was an amalgamation. He similarly denied that the 1994 Contract of Co-partnery began a "new firm" in July 1992 and that a number of different firms had carried on business at that same address since 1989. The 1991 Heads of Agreement was an internal arrangement and made no difference to the outside world. In terms of Clause F it was clear that the Lefevre partners had to pay even if there was no recovery.

[8] It was put to Mr Morgan that Collies could have sued Lefevre and Budge to which he replied that that would have been contrary to the wishes of the Lefevre partners, including the defender. The partnership accepted their assurances that they would "sort it out". They were somewhat reluctant to press Clause F on the Lefevre & Co partners as they were financially in trouble. No adjustment to the defender's salary was made because of the continuous assurances that the matter was being dealt with. In terms of Clause Eighth of the Contract of Co-partnery, "the debt" was not a loss; it was capital owed by Lefevre and Budge. Mr Morgan refused to accept that on the defender's dismissal there was a clear understanding that nothing was then due by him to the firm.

[9] In re-examination, Mr Morgan said that the purpose of the salary deduction provision in Clause F was to meet the position where there might have been some shortfall. It would have been painful if the defender was to receive no share of profits and no salary. For example, if the defender had left the firm a week after the agreement it could not be the case that he would have to pay nothing.

[10] The next witness was the defender. He confirmed his history with the pursuers. He knew the pursuers as a long established firm. The firm always carried on as normal to the outside world. Business was carried on from day to day and there was no hiatus at amalgamation. He accepted that there was continuity despite changes in the partners. He also accepted that he had signed the Lefevre accounts and that "the debt" as adjusted was due to Lefevre & Co. He further agreed that the Lefevre & Co partners undertook responsibility for recovery by negotiated settlement. Furthermore, he did not dispute that they undertook to make good the debt whether the deficit was total or partial. There was a reluctance on the part of everyone to go to Court against Lefevre and Budge. There was sizeable correspondence with the two. He asserted that eventually the file was handed to the pursuers' Court department for proceedings and that there was no reluctance on the Lefevre partners to take action but nothing was done. However, he accepted that any proceedings would have to run in the name of the Lefevre partners alone and that they took no action. In relation to Clause F it was clear that settlement might take some time and that it would not have been fair to make deductions from his salary. He claimed, however, that in terms of the clause that was the only method of repayment. When asked about the "business efficacy" test of construction, he could make no satisfactory answer. When his employment ended he was given £5,000 as an ex gratia payment to tide him over. However, he understood that there was then to be nothing due to or by either party. That was his understanding after a brief discussion with Mr Rennie and Mr Buchan. He was given a letter but he could neither find it nor remember its terms. He then accepted that there had been no reference to the Heads of Agreement and that it did not form part of any discussion. His impression was just that the thing had been forgotten about. He also accepted that he would never act for a client in such a manner but would get a formal discharge. As to the meeting on 8 August 1996 he had not been there but was told about it by Mr Rennie.

[11] The defender's evidence was then interrupted by that of Mr Rennie, a witness for the defender. He had been one of the three Lefevre partners on amalgamation. The Heads of Agreement had largely been drafted to give the defender financial assistance. He attended to the negotiation in terms of Clause F but Mr Lefevre refused to pay. He accepted that there was responsibility on the three of them. He claimed that adjustment of salary was a vital provision as there was no other way the defender could settle the debt. No such adjustment was ever made. "The debt" was discussed from time to time and finally remitted to the Court department. Counsel's opinion had been sought but was unfavourable regarding success. He said he had met with the defender to discuss his departure from the firm. He had drafted a letter which was given to the defender. The letter (now produced as No.16/2 of process) made no reference to Clause F. The Heads of Agreement had not been discussed. It was his view that they had been "confined to the dustbin" sometime previously. He claimed to have been given verbal assurances that he would not be pursued. At the meeting of 8 August it had been agreed that "the debt" be written off - i.e. extinguished - and the pursuers' accounts debited accordingly. This reflected the de facto position which had existed for some time. He gave the defender a report of the meeting because he was being sued.

[12] The defender then continued his evidence and was cross examined by his counsel. He accepted that discussions about "the debt" continued up till his departure and that his colleagues were aware no settlement had taken place. The "deficit" provision in Clause F was very important to him as his financial position was very poor.

[13] The next witness was for the pursuers and was Alexander Buchan, their senior partner. He confirmed much of the evidence given by Mr Morgan. He denied that the firm ever lost interest in "the debt". It was discussed at practically every partners' meeting for years. No impression was ever given that the Lefevre partners would be "let off" the money. He was present when the discussions which resulted in the defender's dismissal took place. He confirmed the ex gratia nature of the payment made and that Clause F was never mentioned. He also confirmed Mr Morgan's evidence about the meeting of 8 August 1996. He refuted Mr Rennie's evidence that Clause F had been "consigned to the dustbin". If there had been any intention to relieve the defender of his liability that would at least have been stated in the letter. In cross examination Mr Buchan agreed with the opinions expressed by Mr Morgan. He said that Mr Rennie was being sued for his share but that Mrs Littlejohn had come to an arrangement to settle her share.

[14] Mr Hammond for the pursuers invited me to sustain the pursuers' first plea-in-law and grant decree in terms of the conclusion. The amount claimed was not in dispute. He referred me to Lord McCluskey's opinion and submitted that the evidence had not altered the position. He further submitted that there might be said to be five issues. The first was whether the pursuers had established that they were the party to whom the obligation in Clause F was owed by the defender. He pointed out that the defender's second plea of no title to sue was not insisted on. Mr Hammond submitted that the firm had remained the same firm in law throughout changes in its personnel. He referred to the Partnership Act 1890, section 4(2), Volume 6 of the Stair Encyclopaedia, p.1026 and the Opinion of Lord McCluskey. The defender had accepted in evidence that his debt was owed to the firm.

[15] The second issue related to the scope of the obligation in Clause F. The first question was whether the obligation was merely to negotiate and not to underwrite "the debt", a question not raised at Procedure Roll. In terms of business efficacy it made no commercial sense to impose an obligation to negotiate only. In any event the evidence of all the witnesses, including the defender, was that it was an undertaking to pay. The next question was whether some payment had actually to be made before there could be said to be a "deficit". He submitted that clearly there could be a 100% deficit. It was any loss to the pursuers which had to be made good. That was the only sensible construction. The next question was whether the failure to recover by deduction from the defender's salary was a material breach. Mr Hammond submitted that this was a bad point. The clause had been conceived in the defender's favour. The implications of the construction contended for would be that if the defender left the firm he would have to pay all the money and have no salary left. Further this was clearly a subsidiary stipulation and a separable one from the obligation to pay. Reference was made to the Opinion of Lord McCluskey at page 11.

[16] The third issue was whether there was a defence to the action that the pursuers had failed to sue Lefevre and Budge for the debt. Mr Hammond pointed out that prescription was no longer a live issue and questioned whether this defence meant some sort of professional negligence. He referred to the evidence of Mr Morgan and Mr Rennie and invited me to prefer the former to the effect that Mr Rennie wished all along to negotiate. In any event that was the whole point in Clause F. It was the responsibility of the Lefevre partners to sue.

[17] The fourth issue was whether the pursuers had somehow waived or discharged or were personally barred from seeking payment. The evidence disclosed only some sort of impression or understanding on the part of the defender and Mr Rennie that the debt would not be pursued. If that had been the case there would have been a formal discharge. There was not even a mention of such an intention in the dismissal letter which was drafted by Mr Rennie himself. Mr Hammond referred to the evidence of Mr Morgan and Mr Buchan to a contrary effect. In any event there was no evidence that the defender had acted in reliance of such a waiver to his prejudice. There was no basis to hold that any actings of the pursuers amounted to a discharge of their rights under Clause F. Mr Hammond pointed out that this question had only been raised by Amendment a week before the proof.

[18] The fifth issue was whether any indemnity in respect of this debt in the defender's favour had been created by Clause Eighth of the 1994 Agreement. Mr Hammond referred me to the judgment of Lord McCluskey at pages 11-13 and submitted that there were no clear terms to cancel the Clause F obligation. "Partnership losses" were clearly not sums due by Lefevre and Budge. He also referred to R v Income Tax Commissioners 1991 Law Times 94.

[19] Mr Bennion for the defender took the same approach as Mr Hammond and agreed that these were the five issues. On the first, whether the debt was due to the pursuers, he submitted that in 1989 on amalgamation a new firm was created with a distinct personality. That occurred again in 1994 and there was no provision that debts due to the old firm should be acquired. The evidence from Mr Morgan that the firm had been the same to the outside world since 1840 was of no assistance. Continuity of business was irrelevant and the pleadings were of no assistance. The pursuers' averments and the evidence led failed to establish that they, as opposed to other firms, had a right to seek payment.

[20] As to the second issue, the scope of Clause F, Mr Bennion submitted that the pursuers' case was based on implied terms, namely that the negotiation could not go on for ever and that the pursuers could expect payment within a reasonable time. How, he asked, could the three force Lefevre and Budge to conclude negotiations. Further, the pursuers relied on an implied obligation on the defender to underwrite one- third of the whole debt if no settlement. Under reference to Roecliff Estates v Co-operative Wholesale Society 1994 S.L.T.592 (Lord MacLean at 594 J-L) he claimed that in this case the implied terms contradicted the express terms and that they were not necessary. The clause would have operated satisfactorily if Lefevre and Budge had settled. The implications sought amounted to a rewriting of the clause and should be rejected. Similarly in the construction of the term "deficit", the pursuers relied on surrounding circumstances. Such circumstances should not substitute for the words of the contract (Bank of Scotland v Junior 1999 G.L.R.284). He submitted that the pursuers were trying to reconstruct Clause F so as to give rise to a right of indemnity in the event of no settlement at all.

[21] On the question of repayment by adjustment of salary Mr Bennion submitted that that provision was fundamental and material. Looking to the agreement as a whole it was clear that adjustment was integral to the defender continuing to work for the five year period. If he stayed on for five years and no adjustment was made, the pursuers were not entitled to seek payment thereafter. There was no good reason for not having started adjustment at day one.

[22] As far as the pursuers' responsibility to sue Lefevre and Budge was concerned, that had no legal significance. But on the evidence the pursuers chose to proceed on an informal basis. There was no evidence of complaint about the defender's failure in negotiations and no case founded on that.

[23] On the terms of the defender's departure, while it was clear that he would not have acted for clients as he did for himself and that Clause F was not discussed, it was not suggested by the pursuers that they would look for the money from the defender personally. Rennie and the defender had an understanding that the pursuers would not look for payment under Clause F. Mr Bennion submitted that there was enough evidence to hold that the terms of departure precluded the pursuers from obtaining payment now.

[24] Finally on Clause Eighth of the Co-partnery Agreement of 1994 Mr Bennion submitted that the phrase "losses however arising" was broad and not confined to trading loss at the end of an accounting period. He invited me not to accept Lord McCluskey on this point and to hold that "the debt" was such a loss as was envisaged by the clause.

[25] I found the following facts to be admitted or proved. The pursuers are a firm of solicitors practising in Aberdeen. In 1989 they amalgamated with the firm of Lefevre & Co. In essence they subsumed that firm and its then partners into their own firm. Prior to that date two partners of the firm of Lefevre & Co had left that firm, Mr Lefevre and Mr Budge. The accounts for that firm were made up to September 1989 and these two partners owed certain sums of money to the firm. Those accounts were certified both by the accountants and also by the few remaining partners, including the defender. The debt owed by Lefevre and Budge to Lefevre & Co. was not disputed. It was further not disputed that on amalgamation the pursuers took over the assets and liabilities of Lefevre & Co. and thus it could be said that after amalgamation the debts owed by Lefevre and Budge and referred to by the partners as the Lefevre and Budge debt were owed to the pursuers. After 1989 things did not go well and in particular "the debt" was not repaid. That situation led to a certain degree of reorganisation within the firm. One aspect of that was that the defender became a salaried partner. Another was that the three Lefevre & Co. partners would need to assume responsibility for "the debt", that is to say, they undertook on a proper construction to retrieve the money from Mr Lefevre and Mr Budge and pay it to the pursuers. In terms of the agreement the then calculated figures were specified. Subsequent adjustments were made to make a more accurate assessment of the indebtedness once the proper tax liability was taken into account. Any failure to recover "the debt" was to be borne by the three ex Lefevre & Co. partners by deduction from their profit shares or salaries over a period of years. In fact, no recovery was ever made and the pursuers now seek to recover one third of that debt from the defender.

[26] It was not disputed by the defender that "the debt" was due. It was not disputed that the three Lefevre & Co. partners, including the defender, were liable for their share of "the debt" to the pursuers. The defender resists payment of "the debt" on a number of grounds and I deal with those now but not in the same order as was presented by counsel. I say at the outset that I entirely agree with the Opinion of Lord McCluskey and do not consider it to have been altered by the evidence. I also preferred the submission of Mr Hammond on all the issues. Firstly, it was claimed that the pursuers' failed to pursue their claim against Lefevre and Budge within the quinquennium. That argument cannot stand as there is no plea of time bar. In any event, I accept the evidence of Mr Morgan, Mr Buchan and indeed that of the defender that the recovery of "the debt" was being actively pursued throughout the period since the amalgamation. Secondly, it was suggested that the pursuers had decided to write off this debt and to consign the 1991 Heads of Agreement "to the dustbin", (these words were used in evidence), and that in some way the actions of the pursuers debarred them from insisting upon the Heads of Agreement. Again this argument cannot stand as there is no plea of personal bar. In any event, the only evidence to support that proposition came from Mr Rennie whose testimony on this point I have no hesitation in rejecting. Had that been the position, I have no doubt that he, an experienced commercial lawyer, would have regularised the position by some writing in order to protect himself if for no other reason. In addition, in answer to questions on this point he was, to say the least, evasive and rambling. In my opinion he was giving a self-serving explanation of the position, bearing in mind that he also is a former Lefevre & Co. partner who is being sued for his one-third share of "the debt".

[27] Next it was suggested that when the defender was required to resign from the firm in June 1996 he was given an ex gracia payment of £5,000 and absolved of his responsibility under the Heads of Agreement for "the debt". That was, apparently, the understanding of both the defender and Mr Rennie, who indeed it was that discharged him. While the defender may have mistakenly gained that impression, which I doubt in light of his professional expertise, I do not believe that Mr Rennie thought that to be the case. He drafted a dismissal letter which contained no reference to "the debt".. Had he received instructions to absolve the defender from "the debt", I have no doubt that he would have expressed that view of the partners in the letter which detailed the arrangements for the defender's departure, not the least because it would have been in his own interest to do so.

[28] It was also suggested that at a meeting after the defender's dismissal the pursuers decided to write off "the debt" and therefore in some way they were thereby debarred from pursuing the defender in this action. Again there is no plea to that effect which should be an end of the matter. In any event, I accept totally the explanation given by Mr Morgan that writing off "the debt" meant that simply that the firm could not still rely on a short term recovery in their negotiations with their bank. It did not mean that the firm no longer relied on the indebtedness, whether met by Lefevre and Budge or the former Lefevre & Co. partners under the Heads of Agreement.

[29] Further, it was suggested that Clause Eighth of the Contract of Co-partnery entered into in 1994 with effect from 1992 whereby the equity partners agreed to indemnify the salaried partners from any partnership losses, exempted the defender from "the debt". I find this argument wholly without merit. This clause is a standard one and clearly relates to trading losses. It has nothing to do with the debt to capital account owed by former partners. Had it meant to cover such a debt it would have done so expressly. Both the defender and Mr Rennie were signatories to this contract and could, if they wished, have insisted on such an express provision.

[30] Some point was sought to be made about the change in personnel in the partnership over the years creating new firms and thus that the Heads of Agreement entered into with one group of partners was somehow avoided by a change in personnel of the partnership. No authority was quoted in support of such a proposition nor do I consider it to be sound in law. In my opinion where, as here, a firm as once constituted ceases to exist but is continued in practical terms of business by some of the original partners and under the original firm name sufficient to enable its identification, with or without addition of new partners, then it cannot be said to be "dissolved" so as to extinguish any debts due to it or so as to extinguish its right to sue in respect of such debts.

[31] Any contrary view could lead to preposterous results, particularly where the debt involved fluctuated in amount from time to time.

[32] It was also suggested that the only method of recovery of "the debt" from the Lefevre & Co. partners was by the deductions I have referred to. No such deduction ever took place. Like Lord McCluskey, who heard this matter on procedure roll, I find this submission to be completely unfounded. That provision in Clause F of the Heads of Agreement was a collateral agreement clearly conceived in favour of the former Lefevre & Co. partners including the defender in order to minimise the burden on them of repayment. It in no way relieved them of their primary responsibility for repayment of the debt. Further, to suggest that the clause only came into operation when there had been some payments resulting in a shortfall is to place upon Clause F a ridiculous interpretation which was, in any event, not supported by any of the signatories to the Agreement who gave evidence, including the defender.

[33] In the whole matter I sustain the first plea-in-law for the pursuers and repel the corresponding pleas for the defenders. No issue was taken on quantum and I therefore pronounced decree as concluded for.