Scottish Court of Session Decisions

On 1 October 1989 two firms of solicitors amalgamated. The Minute of Agreement bears to be between nine person, all partners of the firm of James & George Collie, Advocates in Aberdeen ("the First Parties") and Robert Donald, David Alan Rennie, Elizabeth-Jane Wilson Littlejohn, and Michael Kenneth Horsman, all partners of the firm of Lefevre & Co., Advocates in Aberdeen ("the Second Parties"). The date of the amalgamation was stated to be 1 October 1989. The amalgamated firm was to be known as "James & George Collie incorporating Lefevre & Co.". The defender is Robert Donald, named in the Minute of Agreement of Amalgamation as one of the Second Parties. In the present action the pursuers found upon that deed as indicating that the defender became a full partner in "the firm". The pursuers' pleadings contain certain ambiguities because of the use of the words "the pursuers" in respect of the period before 1 October 1989, when it would have been more appropriate to refer to James & George Collie, the firm which existed before 1 October 1989. The term "the pursuers", as counsel for the pursuers has acknowledged, is not necessarily apt for the firm established in 1989, by whatever name it came to be known. However, it is plainly averred that the defender was a full partner in the new firm and that he eventually became a salaried partner with effect from 1 July 1991. He resigned from his partnership in August 1996. The pursuers aver that, at the date of the amalgamation, Lefevre & Co. were owed sums of money by two former partners of Lefevre & Co. who had left that firm in 1987. The debt due by one of them, Frank Lefevre, was said to be £22,661 as at the date of the amalgamation. The debt due by Evan Budge was said to be £12,392 at that date. It is further averred that the balances due then have since fallen to be adjusted in respect of further liabilities and credits applicable to these debts, with the result that the sums outstanding as at the date of the raising of the action were £13,863.19 in respect of Frank Lefevre and £19,995.02 in respect of Evan Budge. A schedule of reconciliation of balances is produced and incorporated into the pleadings to demonstrate how these figures are arrived at. The total present indebtedness is averred to amount to £33,858.21. No question of relevancy is raised at this stage in relation to this total. The sums due are a matter for proof. The pursuers further aver that the partners in the amalgamated firm became dissatisfied with the arrangements entered into in 1989 and sought to make new provision to regulate the rights and liabilities of the three remaining former Lefevre partners, Mr. Donald, Mr. Rennie and Miss Littlejohn: Mr. Horsman had retired from the amalgamated firm at an earlier date. Accordingly a formal "Heads of Agreement" was entered into in 1991: Production 11/2. Both parties refer to it for its terms and it is incorporated into the pursuers' pleadings. What that document purports to do is to set forth an agreement between "the partners of James & George Collie as to the position, rights and liabilities of Messrs Donald and Rennie and Miss Littlejohn 'in the firm of James & George Collie effective from 1 July 1991'". The first part of the 1991 document sets out particular provisions applicable to each of the three former Lefevre partners individually. The latter part is headed "GENERAL" and contains the following clause:

The pursuers claim that Mr. Donald, Mr. Rennie and Miss Littlejohn are each responsible for one third of the sum totalling £33,858.21 which has been derived by means of the calculations referred to earlier from the two sums of £22,728.50 and £12,392.00. In the present action the pursuers sue Mr. Donald for his share, namely £11,286.07. The pursuers seek a Proof before Answer in respect of the whole case but have asked leave to amend their first plea in law by substituting the word "undertaken" for the word "guaranteed" in the first line of their first plea in law. The defenders argue that the pursuers' case is irrelevant, but no longer insist in their third plea in law which relates to a sist pending arbitration, or their fourth plea in law which was added in support of an argument that any obligation resting upon the defender in terms of the 1991 Agreement, paragraph F was void and unenforceable for want of certainty; that argument is not now advanced.

The first argument submitted by Mr. MacNeill on behalf of the defender was in support of his second plea in law (no title to sue) but, as Mr. MacNeill acknowledged, the point taken was substantially one of relevancy. It was that set forth in paragraph 1 of the Note of Arguments for the defender (No. 8 - received 10.12.98). As will be seen from that paragraph, what is suggested is that the averments are not sufficient to enable the court to be satisfied as to who the pursuers truly are and how they are constituted. It is suggested that if the defender has any obligation to make payment in respect of the debts previously incurred by Frank Lefevre and Evan Budge then the source of that obligation must be the Amalgamation Agreement. However, the firm constituted by the Amalgamation Agreement had been superseded by a later Partnership Agreement (No. 16/1 of Process) dated 15 August 1994. There were, it was submitted, no sufficient averments to permit the partnership which was constituted by the 1994 Agreement to recover the sum said to be due. Although that Agreement was entered into on 15 August 1994 it is clear from the preamble that the persons entering into that contract of co-partnery had been practising as solicitors under the firm name of "James and George Collie" and it was to continue to be known by that name. It was clear, it was submitted, both from the pleadings and the documents themselves that the present pursuers were not the same entity as the body to which the defender became obligated, whether by the events and Agreement of 1989 or by the variation by the Heads of Agreement in 1991. Partners had come and gone. Those partners who had remained at particular dates had, in some instances, ceased to be profit-sharing partners and had become salaried partners. Even the firm name had changed, as evidenced by the document referred to. Reference was made to the terms of No. 16/1 of Process, the contract of co-partnery, whereby the defender and others became "salaried partners", not contributing or expected to contribute to the capital of the firm. In these circumstances the short point was that the pursuers' averments, even including the documents incorporated therein, left it totally unclear that the defender's obligation, if any had been undertaken, was owed to the present pursuers. The pursuers' pleadings themselves betrayed considerable confusion about the identity of the person entitled to the benefit of that obligation over the various changes occurring in and since 1989. In these circumstances, the pursuers could not be said to have relevantly averred their title to sue or the basis upon which they could ask the court to hold that the defender might be liable to pay any sum of money to the pursuers, being a firm of solicitors as presently constituted.

The second argument presented on behalf of the defender related specifically to Clause F) of the 1991 document which, it was now clear, was the basis upon which the pursuers were claiming that the defender had an obligation to pay. That, it was clear, was the current position of the pursuers, having regard to the [revised] Note of Arguments for the pursuers lodged 16 December 1998, where it is specifically stated, in paragraph 1, "...the pursuers found on Clause F) of the 1991 Heads of Agreement...". The argument, as set out in paragraph 3 of the Note of Arguments for the defender, was that Clause F) provided for a specific method of recovering from the defender ( and others) any sum due in respect of the debts deriving from Frank Lefevre and Evan Budge. Accordingly, it was not open to the pursuer to recover any such sums by suing for them. The effect of Clause F) was that any obligation on the defender arising out of that Clause was extinguished with effect from the date appearing in the Clause, 30 June 1996, as the recovery machinery specified therein had not been used.. Accordingly Clause F) excluded the present claim in this action. In so submitting, Mr. MacNeill accepted (without prejudice to the other arguments) that if the creditor in the obligation had in fact deducted the sums calculated to be due from the monthly salaries prior to 30 June 1996 the defender could have had no complaint in respect of such deductions. However, that had not been done, and the result was that the obligation upon the defender to pay any sums in respect of Clause F) had ceased to exist.

The third argument related to the effect of the Contract of Co-partnery dated 1994. This contract, although dated 15 August 1994, acknowledged that the partners had been practising as solicitors and that the partnership had been changed with effect from 1 July 1992 by the assumption to the firm of a new partner (Michael William Anderson). The preamble made it clear that all the partners, including Robert Donald, were entering into a new contract of co-partnery. This document appeared to constitute a firm known as "James and George Collie" and provided that the partnership should be held to have commenced on 1 July 1992. Clause Third dealt with the contribution of the capital of the firm by named partners; Appendix II set forth the capital shares in the partnership; it did not include any reference to the defender. Clause (Eighth) provided for indemnification of the salaried partners, stating that:

In Mr. MacNeill's submission, the sum now claimed fell under the description "all partnership losses" and the defender, as a named salaried partner, fell to be relieved by the profit-sharing partners, the pursuers, of liability for any part of the total of £33,858.21. The effect of this Clause, it was submitted, was to extinguish any right to claim payment of the debt, even if it subsisted at that date.

In responding to these submissions, Mr. Hammond acknowledged that certain of his averments about the identity of the firm immediately before and immediately after the amalgamation in 1989 were badly expressed. He submitted, however, that the court should look not only at the pleadings themselves but at the documents which were incorporated into the pleadings by reference. If that were done, it could be seen that the errors of expression in the pleadings themselves were not material. In his submission the changes in the partnership after the amalgamated firm came into existence were of no significance. He drew attention to the opening words of section 4(2) of the Partnership Act 1890, "In Scotland a firm is a legal person distinct from the partners of whom it is composed...". This basic principle was well reflected in volume 16 of the Stair Encyclopaedia, paragraph 1026. In particular he referred to the passage reading,

In his submission, in the ordinary case, when a debt is owed to a firm, the obligations in respect of the debt are not affected by changes in the composition of the partnership. There could be exceptions, for example, in relation to a contract involving delectus personae, such as in a contract of employment. There was no such special feature here. It was of no moment to a debtor such as the defender whether there were changes in the partnership while the firm as a separate entity continued in existence. In this regard, reference was made to the speech of Lord Reid in Inland Revenue v. Graham's Trustees 1971 S.L.T. 46 at page 47, column 2 and 1971 S.C. (HL) 1 at page 20, where his Lordship drew attention to a passage in Bell's Commentaries to the effect that the intention of the parties would be studied in cases where the obligation had been undertaken to the firm to see whether it was meant to be limited to the partners at the time "or to be extended to the house under all the changes it might undergo". Lord Reid indicated that he would be willing to apply the concept of a "house",

Although he added that it would be much more difficult to apply such a concept between the firm and one of its partners that observation had to be seen in the context of the facts of that case in which there was a specific clause, Clause 8, dealing with the consequences of the dissolution of the partnership. Reference was also made to the speech of Lord Young in Alexander v. Lowson's Trustees (1890), 17 R. 571 at page 579, where his Lordship emphasised the importance of looking at the intention of those involved in circumstances such as the present. The Heads of Agreement, effective from 1 July 1991, though dated 16 September 1991, contained Clause F) which plainly envisaged a future extending for another five years, until 30 June 1996. It also envisaged in Clause H) a new partnership agreement being executed before 30 November 1991. Thus in the very document which, in the pursuers' submission, the existence of the defender's obligation is stated, the parties, including the defender, were intending that that obligation, if not purified, would subsist for years to come. In these circumstances, counsel submitted that it was clear that the firm was the entity which had the right to sue in respect of the debt, the existence of which was clearly recognised in Clause F) of 11/2 of Process. At the very least, counsel submitted that the pursuers' averments relating to their right to sue the defender for this sum passed the ordinary test of relevancy, which is that an action will not be dismissed as irrelevant unless it must necessarily fail even if all the pursuer's averments are proved; see Lord Normand's speech in Jamieson v. Jamieson 1952 S.C. (H.L.) 44 at page 50.

In relation to the submission to the effect that the obligation undertaken by the defender in the opening words of Clause F) of 16 September 1991 was irretrievably bound up with the mechanism contained in the later provision for recovery of any deficit by adjustment to the monthly salary over the period to 30 June 1996, counsel referred to the familiar rule seen in Wade v. Waldon 1909 SC 571 that a contract might contain various stipulations, some of which went to the root of the contract and others which did not. Mr. Hammond submitted that, as a matter of construction, it could be seen that the mechanism for making good any deficit which resulted from the negotiation of a settlement was quite separable. This being so, and against the background of the fact that the three named persons whose liability was referred to in Clause F) were the very ones responsible for negotiating a settlement which might produce a deficit, or a surplus, and in the absence of any averments of prejudice, the court could properly conclude that the mechanism for recovery by deduction from salary was subordinate. In that context, counsel pointed out that if this was not the correct construction, that would mean that the death of a person such as the defender after a settlement had been effected in terms of the opening part of the clause but before recovery had been made in terms of the second part of the clause would render it impossible to make the recovery, because the deceased obligant would no longer be drawing a monthly salary. He accepted that the court might not be satisfied that the correct date for ascertaining the amount due was that averred by the pursuers, namely 23 October 1996; but that was an issue to be settled after Proof before Answer. The pursuers' averments on this matter were perfectly adequate for the purposes of allowing a Proof before Answer.

In relation to the third argument, as to the effect of Clause 8th of the 1994 Contract of Co-partnery, he submitted that the contract therein contained was collateral to the quite separate 1991 Heads of Agreement. The separate obligation contained in Clause F) of the 1991 Heads of Agreement was not cancelled out by the Contract of Co-partnery in 1994. It would need a very clear term in a subsequent document to discharge a debt constituted in clear terms by an earlier formal contract. There was no such term; there was only silence. The two documents were of a different kind and there was nothing in Clause 8th of the 1994 document to cancel the obligation evidenced by Clause F) of the 1991 document. In any event, it was submitted that the words "liability for all partnership losses howsoever arising" in Clause 8th could not possibly cover the sums due by Frank Lefevre and Evan Budge. These sums might be regarded in a sense as money lost to the partnership; but they could not be regarded as "partnership losses". The whole clause was concerned with making it clear that those who shared in the profits had also to bear the burden of any losses. The meaning was clear, namely that the profits, or alternatively the losses, would be ascertained in the ordinary way from the profit and loss account. There was no warrant for looking at individual transactions. On this point Mr. MacNeill replied by suggesting that the reference to misdemeanour by a salaried partner resulting in a final judgment of professional negligence or a proved charge of professional misconduct indicated that the document was indeed concerned with individual losses.

In my opinion, the submissions for the pursuers are to be preferred. In relation to the first point, as counsel for the defender acknowledged, this is not truly a point of title to sue. The point is whether or not the averments of the pursuers pass the test of relevancy in relation to showing that the debt for which the defender undertook responsibility in 1991 was owed to the firm whose present manifestation is the pursuers in the present action. Although the wording of the pursuers' averments in relation to the designation of the various parties in the early stages could have been improved substantially, the court must have regard to the documents which are incorporated into the pleadings and which make the position clearer than it appears to be in the averments themselves. In my opinion, the pursuers have averred quite sufficient to indicate that when the defender undertook the obligation which is evidenced by Clause F) of the 1991 Agreement he had in mind that any payments which he was obliged to make would be made for the benefit of the firm in which he was a salaried partner, and equally that if there was any surplus on settlement with Frank Lefevre and Evan Budge it would be credited by that firm to the credit of the defender, Rennie and Littlejohn. At the very least, these averments, including the documents incorporated brevitatis causa into them, pass the well-known test of relevancy found in Jamieson v. Jamieson, supra.

I also agree with Mr. Hammond that there is nothing in Clause F) to suggest that the method of recovery referred to in the third sentence of that Clause is a material term of the contract. I read that provision as simply empowering the firm to make appropriate recovery by way of adjustment to the monthly drawings/salary of the named salaried partners. If there were no such provision it would not have been possible for the firm to recover the money in this particular way; but it would still have been recoverable in the ordinary way. In my opinion, it is clear as a matter of construction that the main obligation is separable from the method of recovery which is envisaged.

In relation to the effect upon the subsistence of the obligation of the Contract of Co-partnery entered into in August 1994, I consider that this is indeed a collateral matter; the contract deals with matters quite separate from those set forth in the 1991 Heads of Agreement. The 1994 contract is silent in relation to the obligation contained in Clause F) of the 1991 Heads of Agreement. I can detect nothing in it that falls to be read as indicating that that separate obligation is to be cancelled out. I also consider that it is clear that on a proper construction of Clause 8th of the 1994 contract the term "partnership losses" refers to losses determined over a whole cycle of the firm's trading, presumably by reference to the annual profit and loss account. It is at that stage that it can be determined if there are losses or profits. What the clause envisages is that if there are losses then, in the ordinary case, the salaried partners will not be made liable to any third party in respect of the partnership losses, albeit they appear on the notepaper as partners. Equally if there are profits, the salaried partners receive no share of the profits. The purpose of the clause to which Mr. MacNeill drew attention in relation to the circumstances in which a loss might be caused by misconduct or professional negligence by the salaried partner is to remove from the offending salaried partner the protection of the normal indemnity, if through his misbehaviour the profits of the partnership are reduced. The Clause does not appear to me to apply in the present case because it is triggered only by partnership losses which might give rise to liability of all the partners (whether salaried or profit-sharing). Accordingly, it does not appear to me that there is anything in the 1994 Agreement to end the defender's obligation which the pursuers seek to enforce in the present action. Mr Hammond agreed that his second plea in law should be repelled. Mr. MacNeill for the defender agreed that his third and fourth pleas should be repelled. I shall therefore repel these pleas and allow parties a Proof before Answer on the whole averments.

I should note that there were certain averments which parties were agreed ought not now to be in the pleadings; they appear to have survived from earlier disputes which were no longer live. In particular there were averments at the foot of page 6 in the second last line starting with the words "Admitted that" and ending with the words "pursuers' offices" in the fourth line on page 7. It was agreed that these averments should not be remitted to probation. They will therefore be deleted at this stage.