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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Ross Harper & Murphy & Ors v Banks [2000] ScotCS 120 (11 May 2000)
URL: http://www.bailii.org/scot/cases/ScotCS/2000/120.html
Cite as: 2000 SCLR 736, [2000] ScotCS 120, [2000] SLT 699
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OUTER HOUSE, COURT OF SESSION |
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CA153/1999 |
OPINION OF LORD HAMILTON in the cause (FIRST) ROSS HARPER & MURPHY AND OTHERS Pursuers; against SCOTT BANKS Defender:
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Pursuer: M Upton; Drummond Miller, W.S.
Defender: R Thomson; Simpson & Marwick, W.S.
11 May 2000
[1] The first pursuers are a firm carrying on the practice of solicitors. The remaining pursuers are individuals who, according to the Instance of the Summons, were as at August 1990 together with the defender partners in the firm then constituted under the style "Ross Harper & Murphy". A client of that firm at that time was the Northern Rock Building Society ("the Building Society"). The Building Society instructed the firm to act as its law agents in a loan transaction for which security was to be granted over heritable subjects in Erskine. The defender was the partner who undertook that work. The pursuers aver that the proposed security subjects, which had recently been acquired by the proposed borrower from a local authority, were subject to a real condition that erection of a dwellinghouse on them be completed within two years of the acquirer taking entry, failing which she was required to offer the subjects for sale to the local authority at a specified price. The pursuers further aver that that condition was onerous and unusual and that it reduced the value of the security subjects to an extent that they did not represent adequate security for the loan. The pursuers aver that in a report on title made to the Building Society the defender informed it that the title to the subjects was in order and was good and marketable. They further aver that he did not inform the Building Society of the real condition.
[2] The Building Society advanced monies to the borrower. She subsequently defaulted in respect of her personal monetary obligations to the Building Society, which in November 1992 obtained warrant for possession of the subjects. At that stage, the borrower having failed to fulfil the condition in the title, the local authority exercised its right to re-purchase the subjects. The Building Society was thereafter unable to recover its loan in full. It also incurred certain fees and expenses. It then sued the firm and its partners (including the defender) for its losses. That action was based on breaches of implied terms in the contract between it and the firm in relation to due examination of and reporting upon title. A similar ground of action was laid in delict. Reliance was placed on alleged failures by the present defender to exhibit the standard of care and skill expected of a reasonably competent solicitor experienced in conveyancing and loan transactions, vicarious liability being imputed to the firm for such failures. After sundry procedure that action was settled by a payment to the Building Society. Although not evident on the face of the pleadings in the present action, it appears that the £20,000 now sued for represents the excess on a professional indemnity insurance policy, the balance of the settlement sum having been met by insurers.
[3] Between the time of the loan transaction and the taking possession by the Building Society of the security subjects an agreement in writing ("the Agreement") was entered into between the present defender on the one hand and the then partners of and trustees for the firm of Ross Harper & Murphy on the other hand, the former being there styled "the Purchaser" and the latter "the Vendors". It was executed on 3 May 1991. It proceeded on the narrative -
"CONSIDERING THAT the Vendors together with the Purchaser for some time carried on the business of Solicitors, Notaries Public and Estate Agents at the Property (as hereinafter defined) (hereinafter referred to as "the Business") and have agreed to sell to the Purchaser the business as a going concern, and without prejudice to the foregoing generality, the assets described in Parts II and III of the Schedule to this Agreement, all on the terms and conditions set out in this Agreement ..."
The "Firm" was defined as meaning the Firm of Messrs Ross Harper & Murphy with its principal office at 163 Ingram Street, Glasgow and "the Property" as the premises at 76 Causeyside Street, Paisley which had hitherto, it seems, been a branch office of the Firm.
[4] Clause 2.1 of the Agreement provided -
"The Vendors shall sell and the Purchaser shall purchase on the settlement date, free from all securities, liens, charges and encumbrances (with the exception of the Leased Assets) for the purchase price specified in Clause 4 and on the terms and conditions contained in this Agreement:-
2.1.1 the equipment, furniture and fittings, of the Business and the work-in-progress and the Assets, details of which are contained in Part III of the Schedule, and all other items used by the Vendors exclusively in connection with the Business;
2.1.2 the Leased Assets as described in Part II of the Schedule and the right to utilise the Leased Assets, subject to the existing agreements entered into between the Vendors and the owners of any particular Leased Asset specified in Part II of the Schedule;
2.1.3 the goodwill, custom and connection of the Business with the exclusive right to carry on the Business as successor to the Firm;
2.1.4 all records of whatsoever nature and howsoever recorded, within the Property in relation to the Business".
[5] Clause 3 provided -
"For the avoidance of doubt it is hereby expressly declared and agreed that, except as expressly provided in this Agreement, the Purchaser shall not assume or be deemed to assume or be responsible for any debt, obligation, liability or other responsibility whatsoever incurred by or on behalf of the Vendors, prior to the settlement date, in relation to the Business, and the Vendors shall jointly and severally indemnify the Purchaser in this respect".
[6] Clause 4 provided for the Purchase Price and made additional provision in respect of other financial arrangements between the parties.
[7] Clause 8 provided:
"8.1 The Vendors undertake to indemnify the Purchaser from and against any and all losses, costs, liabilities and expenses arising out of, or in connection with:
8.1.1 the ownership of the Assets or the Business, or the Firm prior the settlement date with the exception of any complaint from a Client of the Business for any alleged professional misconduct in respect of work carried out by the Business prior to the settlement date;
...
8.2 The Purchaser hereby undertakes to indemnify the Vendors from and against any and all losses, costs, liabilities and expenses arising out of, or in connection with:
8.2.1 the ownership of the Business or the carrying on of the Business by the Purchaser from and after the settlement date;
8.2.2 any complaint from a Client of the Business for any alleged professional misconduct in respect of work carried out by the Business prior to the settlement date".
[8] Clause 18 provided -
"By their respective execution of this Agreement, the Purchaser confirms that he has no claims, of whatsoever nature and howsoever constituted against the Vendors or any of them or against the Firm, except as set out in this Agreement and the Vendors confirm that neither they nor any of them nor the Firm has any claim against the Purchaser, of whatsoever nature and howsoever constituted, other than as set out in this Agreement".
[9] No point was taken in the course of the discussion before me that the constitution of the firm "Ross Harper & Murphy" was or may have been different at various times during the material history, such as at the date of the alleged negligence in respect of the Building Society, the date of the Agreement, the date when the Building Society sustained loss, the date when its action was settled or the date when the present action was raised. I proceed on the basis that nothing of importance turns on that matter. I shall hereafter refer to that firm as it may have been constituted from time to time as "the firm".
[10] This commercial action was sent for debate on three issues but at the hearing Mr Thomson for the defender intimated that he was not to insist on one of these (which concerned the effect of the terms in which the Building Society's action had been settled). In relation to the other two issues, the scope of the discussion as it developed was somewhat wider than envisaged by the prior interlocutor but counsel were in the end content to proceed on that wider basis. The first principal issue discussed concerned the relevancy of the pursuers' claims against the defender of breach of contract and of common law fault. The second principal issue discussed concerned the relevancy of the Defences in so far as based on the Agreement.
[11] In relation to the first principal issue it is important to notice certain averments made by the defender. These include:
"The defender, in accordance with the training he had received with the pursuers as a law apprentice during the period 1977 to 1980 when he qualified as a solicitor, did not examine the title [of the security subjects] in detail. The defender was an apprentice with the pursuers' East Kilbride office between May 1979 and January 1980 under the direct supervision of the resident partner, Brian Bonnar, the fourth named pursuer. Mr Bonnar instructed the defender that he did not require to examine titles of heritable property where the pursuers' firm had noted the title previously and in particular where they had done so within the previous 12 months. The defender was aware that the title had been registered within the preceding 12 months and the defender was aware that the conveyancing had been undertaken by an experienced assistant solicitor. As a further example, in about 1986/87 the defender was instructed by a client to purchase a flat in a new residential development in Mansionhouse Gardens, Langside, Glasgow. The defender discussed these instructions with James Herald, the ninth named pursuer, who was resident partner at the pursuers' Shawlands office. Mr Herald told the defender that he, Mr Herald, had already purchased a number of properties in the development for clients of the pursuers, that accordingly the title was good and that there was need for the defender to note the title in detail".
[12] The pursuers aver that it was an implied term of the firm's contract with the Building Society that the agent handling the transaction would examine the title and ensure that it constituted a good and adequate security for the loan. Certain other related implied terms of that contract are then averred. There follows an averment that the same obligations were owed to the Building Society under a duty of care owed by the defender for whose fault the firm was vicariously responsible. The pursuers subsequently set out on averment their propositions in respect of the relationship between the defender on the one hand and the firm and his fellow partners on the other. Their primary averment is in the following terms -
"It was an implied term of the parties' contract of co-partnery that the defender would exhibit reasonable care in the performance of work for clients of the pursuers, such as the Building Society, so as not to expose the partnership to claims for professional negligence".
That averment is then particularised and breach of contract by the defender resulting in loss to the firm averred. The pursuers additionally aver -
"Explained and averred that, esto the defender did not, as he avers, examine the title in any detail at all (which is not known and not admitted), in failing to give it any such detailed examination he was guilty of gross negligence, et separatim of culpable negligence, et separatim of a major blunder, et separatim of failing to exercise the care that a reasonable law agent would exercise in the conduct of his own affairs".
The sources of these alternative formulations will subsequently become apparent. The pursuers further set out against the defender a case of negligence at common law on essentially identical grounds.
[13] The first principal issue raises questions of some general importance concerning the circumstances in which a remedy in damages may be available to a partnership and the "innocent" partners of it when the former directly and the latter subsidiarily have been found liable to a third party as a result of the act or omission of a "delinquent" partner. I was favoured by counsel on each side with a full and helpful analysis of such authority as does exist on this matter. It is evident that the law in important respects remains unclear.
[14] It may assist by first emphasising what this case is not about. The present action is not one for "relief" in the proper sense of that term. Neither the firm nor the "innocent" partners sue the defender for a contribution towards loss sustained in circumstances where the partners were under a common obligation to a third party and one of them has discharged that obligation. The present action is one for damages in which the pursuers seek to recover from the defender the whole loss, except in so far as already met by insurance, which they have sustained by reason of liability being incurred to the Building Society. They rely not upon any remedies flowing from any common obligation owed to the Building Society but upon terms said to be implied in the contract of co-partnery and on duties of care said to be owed by the defender to them at common law. A like distinction is noticed by Lord President Emslie in British Railways Board v Ross & Cromarty County Council 1974 S.C. 27 at pp.36-7.
[15] It is also pertinent to notice that, although the action proceeds on alleged implied terms of the relative contract of co-partnery and of alleged duties of care arising out of that relationship, no relative partnership deed was placed before me. I would be surprised if none had existed and find it less than satisfactory to discuss implied contractual terms where it is unclear whether express terms were committed to writing. I was asked, however, to proceed on the assumption that there was no provision in any relative partnership deed inconsistent with or contradictory of the terms to be discussed - in effect, to proceed as if there had been no relative partnership deed. I do so with some reluctance.
[16] Authority in Scots law on the liability of partners to each other in circumstances such as the present is somewhat limited. Stair - Institutions I, 16, 7 - puts it thus -
"Partners are liable each to other, for such diligence as men do ordinarily use, or the partners themselves use, in their own affairs; for this contract being undergone for the mutual good of the parties, the diligence keepeth the middle way betwixt exact diligence and supine negligence: but none of them are liable for what is lost by force or accident, without their fault".
[17] Erskine - Institute III, 3, 21 - states -
"It also proceeds from the mutual confidence inherent in this contract [of partnership] that the several partners are not always obliged to use that middle kind of diligence which prudent persons employ in their own affairs; they are secure if they manage the company's concerns as they would do their own. If, therefore, a partner should fall into error in management, for want of a larger share of prudence or skill than he was truly master of, he is not answerable for the consequences. He did his best; and the other partners have themselves to blame that they did not make choice of a partner of greater abilities".
[18] Both institutional writers refer for their respective propositions to the position in Roman law as expressed in the Institutes of Justinian at III, xxv, 9. That text, as translated by Professor Thomas (1975), is in the following terms -
"It has been asked whether one partner is liable to another by the partnership action (pro socio) only for his fraud, like one who allows a thing to be deposited with him, or also for negligence, i.e. in respect of his inertia and lack of care: the view prevailed that he is liable also for negligence. But negligence, in this context, is not directed to the highest standard of care: it is enough that the partner shows, in partnership matters, such care as he would show in his own affairs. For one who takes a partner who is deficient in care, should complain of himself (i.e. attribute the defect to himself)."
[19] These passages from Stair and Erskine were referred to by Sheriff Macvicar in Blackwood v Robertson 1984 S.L.T. (Sh.Ct.) 68. At p.71, under reference to these and certain other authorities (including English cases), Sheriff Macvicar concluded -
"Accordingly, I take it to be the law of Scotland that a partner may in serious cases be made liable to his fellow partners for loss occasioned in the partnership business by his lack of care or skill, but that a minor blunder will not give rise to a right of action. The use of the phrase "culpable negligence" in the English cases suggests that the same principle applies south of the Border. In certainly seems reasonable that, since the partnership as a whole takes the benefit of exceptionally astute business dealings by one of the partners, it should also bear a loss caused by an occasional lack of astuteness ...".
[20] In Mair v Wood 1948 S.C. 83, when discussing whether a joint adventure (or a partnership) could be vicariously liable to one of its partners for loss and injury caused by the fault of another partner, Lord Keith at pp.90-1 said -
"There are wrongs or failures in duty which, when committed by a partner, produce certain legal consequences in a question with fellow - partners. These are breaches of the duty owed by a partner to the partnership in the conduct of the partnership affairs. It is immaterial here to consider what is the standard of duty so imposed. It would seem to be lower than the duty expected of a partner in relation to third parties being measured by that diligence which he would show in his own affairs. What it is material to notice is that such failure of duty gives rise to a claim against the delinquent partner by his co-partners for the loss caused to the partnership or to their interests as partners ...".
His Lordship then cites Clark on Partnership p.330, Lindley on Partnership (9th edition) at pp.472-3, Bowstead on Agency (10th edition) pp.103, 107 and Campbell v Campbell (1840) 1 Rob. 1. None of the other judges touches on this matter.
[21] In Clark on Partnership (published in 1866) it is stated at p.330 under the heading "Liability to the Company" -
"In the English case of Bury v Allen it was stated by the Court: 'Suppose the case of an act of fraud, or culpable negligence, or wilful default by a partner during the partnership, to the damage of its property or interests, in breach of his duty to the partnership; whether at law compellable or not compellable, he is certainly in equity compellable to compensate or indemnify the partnership in this respect'. The case of Campbell v Campbell is also a strong example of the application of the principles here enunciated. In that case one of the partners of a distillery company having been found liable in Excise penalties in consequence of the others having without his knowledge engaged in illicit distillation, they were held bound to indemnify him in full. And where, again, a partner exceeded the limits of his agency, and thereby involved the other partners in heavy responsibilities, they were found entitled to relief in full against him".
[22] The passage from Bury v Allen, reported at (1845) 1 Colly. 589 at p.604, is repeated in the current edition of Lindley and Banks on Partnership (referred to below). The proceedings in the Court of Session in Campbell v Campbell are reported at (1834) 12 S. 573. Modern Scottish text books on reparation (Gloag on Reparation (4th edition) and Walker on Delict (2nd edition)) do not appear to address this issue specifically. Miller on Partnership (2nd edition) (published in 1994), somewhat surprisingly, does not refer to Blackwood v Robertson nor to either of the passages from the institutional writers nor to Lord Keith's observations in Mair v Wood. The discussion at pp.192-4 is of limited assistance for present purposes.
[23] In view of the reliance placed by Clark, by Lord Keith in Mair v Wood and by Sheriff Macvicar in Blackwood v Robertson on English authority it is of interest to note how the law has been declared and developed in that jurisdiction - though with the caution that differences exist between Scots and English law in relation to some aspects of the law of partnership. In Lindley and Banks on Partnership (17th edition) at para. 20-10 it is stated -
"Prior to the Partnership Act 1890, if a partner was guilty of a breach of his duty to the firm and loss resulted therefrom, he was in effect required to bear the entirety of that loss. As Knight Bruce V.-C. observed in Bury v Allen:
'... it is, I apprehend, plain, that one of two partners may have a demand against the other for compensation, substantially in the nature of liquidated damages, enforceable in equity, and in equity only. Suppose the case of an act of fraud, or culpable negligence or wilful default, by a partner during the partnership, to the damage of its property or interests, in breach of his duty to the partnership: whether at law compellable or not compellable, he is certainly in equity compellable to compensate or indemnify the partnership in this respect.'
It is apprehended that the Partnership Act 1890 did not alter the law in this respect and that reliance may still be placed on the earlier cases, although it is not entirely clear what degree of misconduct or negligence is required to invoke this principle. The current editor takes the view that, consistently the Vice-chancellor's observations, something more than "mere" negligence must normally be shown, i.e. gross negligence or recklessness in the course of carrying on the partnership business. Thus, where a claim is made for payment of a debt allegedly (but not in fact) due from a firm and one partner chooses to pay it, he will not be permitted to charge such payment to the account of the firm. Equally, it is difficult to see why the principle should not also be invoked in cases where a partner incurs a liability to a third party as a result of an act or omission which is negligent not as regards a third party but as regards his co-partners".
The authorities there cited include Thomas v Atherton (1878) 10 Ch.D. 185 where "personal misconduct or culpable negligence" are referred to by James L.J. at p.199 and McIlreath v Margetson (1785) 4 Doug. 278 (where Lord Mansefield at p.279 simply refers to the defendant having been "guilty of negligence"). The editor's view in the passage quoted appears only in the seventeenth (the most recent) edition.
[24] The passages in Stair and in Erskine are not free from ambiguity and difficulty. Stair appears to state two tests for the relevant diligence, namely, that which "men do ordinarily use in their own affairs" (a general objective standard) and that which "the partners themselves use in their own affairs" (possibly an objective standard but one specific to that in use by the particular partners). It is not clear that the application of these alternatively expressed tests to a particular situation would give the same result. However that may be, the rationale for "the middle way" is the mutual good of the particular partners.
[25] Erskine, on the other hand, appears to reject a test based on any standard other than one referable to the "delinquent" partner. A partner, he suggests, is secure from suit if he manages the partnership concerns as he would do his own, whatever that standard of management might be - a test which is essentially subjective.
[26] It is not easy to reconcile these authorities. However, while the formulation adopted by Erskine may more closely reflect the Roman law text on which both institutional writers bear to rely and may also be in line with what Lord Keith indicated, albeit obiter and tentatively, in Mair v Wood, that adopted by Stair forms, in my view, a somewhat more satisfactory basis for modern Scots law. A standard of care based exclusively on that referable to the individual alleged to have been at fault seems less satisfactory, even in the context of a partnership relationship. On the other hand, the standard of care owed by partners among themselves must, in my view, reflect the nature of the partnership relationship and must also be affected by the incidents and practices within the particular partnership where the issue arises.
[27] Erskine's formulation, and that of the Roman law text, would severely limit the circumstances in which a remedy was available between partners. The rationale given is that "the other partners have themselves to blame that they did not make choice of a partner of greater abilities". Mr Thomson supported that rationale, pointing out further that the assumption of partners is by unanimous decision, that it is of the nature of partnership that, subject to agreement, it involves the equal spreading of risk and that all the partners would have the advantage of the minimal exposure to liability amongst themselves which Erskine's formulation imports. While there is some force in this argument, it assumes, in my view, a greater prescience in the selection of co-partners than is truly practicable; nor is it a satisfactory solution that after the event the other partners may be able to bring their partnership relationship with the "delinquent" partner to an end - though that of itself may not always be straightforward. Moreover, as Mr Upton for the pursuers submitted, it would be particularly difficult to apply the Erskine test in circumstances where the partner in question was a corporate body.
[28] The primary position adopted by Mr Upton was that there was by operation of law a term implied in any contract of partnership that each partner would take reasonable care to avoid loss being caused to the firm or through it to his co-partners and that the relevant standard of care was that formulated by Lord President Clyde in Hunter v Hanley 1955 SC 200 at pp.204-6. That formulation recognised that what constituted negligence must vary with the circumstances. It would allow, Mr Upton argued, consideration to be given to any internal circumstances within the firm which might lead to a difference between the firm's liability to the client and the "delinquent" partner's liability to the firm.
[29] Before addressing that argument I consider it helpful to notice a development in English law. Among the authorities cited by Lord Keith in Mair v Wood is the tenth edition of Bowstead on Agency. The passages referred to deal with the duty of care owed by a gratuitous agent to his principal, such duty being owed under English law in tort, there being under that system no contractual relationship between a gratuitous agent and his principal. At pp.107-8 of that edition it is stated that a gratuitous agent is liable to his principal for "gross negligence". There is added -
"But an omission to exercise such skill as he actually possesses, or has held himself out to possess, or such skill as may reasonably be implied from his profession or employment, or to exercise such care and diligence as he is in the habit of exercising in regard to his own affairs is deemed gross negligence for the consequences of which he is responsible to the principal".
However, the learned author of the current (sixteenth) edition of Bowstead and Reynolds (Professor F.M.B. Reynolds) describes at para. 6-030 the standard of care owed by a gratuitous agent to his principal as follows -
"It was formerly customary to state, and earlier editions of this work did state, that the duty of care owed by a gratuitous agent was one of such skill and care as persons ordinarily exercise in their own affairs. This idea, which is similar to the diligentia quam suis rebus of Roman law (where different contracts had different prescribed levels of care) was derived in English law from old cases on bailment, which suggested (in like manner) that whereas a contractual bailee was liable for negligence, a gratuitous bailee was only liable for gross negligence. But as Rolfe B. remarked in 1843, gross negligence can be said to be no more than negligence with a vituperative epithet; and the determination of fixed standards for different types of case is not a technique now used by English law. Ormerod L.J. said in 1962 -
'It seems to me that to try and to put a bailment, for instance, into a watertight compartment - such as gratuitous bailment on the one hand, and bailment for reward on the other - is to overlook the fact that there might well be an infinite variety of cases, which might come into one or the other category. The question we have to consider in a case of this kind, if it is necessary to consider negligence, is whether in the circumstances of this particular case a sufficient standard of care has been observed by the defendants or their servants.'
This view has now been specifically accepted for gratuitous agency".
Reference is made to Chaudhry v Prabakhar [1989] 1 W.L.R. 29. Professor Reynolds then observes with respect to that case "... the Court of Appeal can be said to have taken the overall view that the agent's duty is 'that which may be reasonably expected of him in all the circumstances'.". While there may be important differences between the relationship of a gratuitous agent and his principal on the one hand and a partner and his firm (or in England his co-partners) on the other, this development may mirror a like reluctance in Scots law to adopt fixed standards for different types of case. Moreover, although the concept of "gross negligence" may survive as an expression in Scots law in relation to certain immunity clauses in trust deeds, the concept of a subjective standard of care, in relation, for example, to trustees, has long been disapproved (Raes v Meek (1889) 16 R. (H.L.) 31, per Lord Herschell L.C. at pp.33-4; Tibbert v McColl 1994 S.C. 178 at p. 183).
[30] Although Erskine's formulation may, on one interpretation, come close to the effective denial of a remedy, I am of opinion that under Scots law a partner may in certain circumstances be liable in damages to his firm (and secondarily to his co-partners) for loss sustained by reason of liability incurred to a third party and that these circumstances are not restricted to those where the offending partner has been responsible for fraudulent or illegal activity; the duty extends, in my view, to a duty of care. The existence, in the absence of provision to the contrary, of such a duty is not, in my view, inconsistent with the terms of the Partnership Act nor of any established rule of common law. The more difficult and uncertain question is whether breach of that duty will occur by "mere" or "ordinary" negligence or only where something more ("gross negligence" or "recklessness" or the like) occasions the loss. In the absence of clear and binding authority I favour a standard which requires the exercise of reasonable care in all the relevant circumstances. Those circumstances will include recognition that the relationship is one of partnership (which may import some mutual tolerance of error), the nature of the particular business conducted by that partnership (including any risks or hazards attendant on it) and any practices adopted by that partnership in the conduct of that business. The adjective "gross", as used in some of the authorities, appears to me to be essentially a word of emphasis rather than one indicative of a category distinction. In respect of liabilities incurred by the firm to a third party, it is, however, important to notice that breach of a duty of reasonable care to the third party will not of itself import a breach by the "delinquent" partner of his obligation to the firm. The legal relationships are different. A firm may incur liability to a third party without breach of any duty of care but as a result, say, of a breach of a term unrelated to negligence contained in the contract with that third party, such breach having been occasioned by the conduct of one of its partners; in appropriate circumstances such conduct might amount to failure by the partner to take reasonable care for the interests of the firm, so giving rise to liability in the partner to it. Likewise, a firm may incur liability to a third party by reason of a breach of an obligation or a duty of reasonable care owed to him but, although such liability had been occasioned by the conduct of a partner, such conduct might not in the circumstances amount to a breach of his obligation to the firm. It is important to avoid conflating the two. The duties are not, in my view, co-extensive. Mr Upton placed substantial reliance on Hunter v Hanley. While that case is of assistance in affirming the proposition that the degree of want of care which constitutes negligence must vary with the circumstances (Lord President Clyde at p. 204) and that, with very limited exceptions, there is only one standard, namely, reasonable care in all the circumstances (Lord Russell at p.207 and Lord Sorn at p.208), it is important to notice that that case was concerned only with a single relationship, that of doctor and patient. It was not concerned with any issue touching on the liability of a partner to his firm for loss sustained by it to a third party due to an act or omission of the particular partner. Moreover, it was concerned with the liability of professional men, whereas any formulation to be adopted in relation to partnerships generally must take into account the fact that many partnerships are formed to pursue trading rather than professional activities.
[31] Mr Thomson submitted that it would be destructive of any relationship of partnership, which depended on high standards of trust and of good faith, if claims between partners were to be admitted other than in exceptional circumstances and that accordingly the implied duty must have a very narrow scope. However, other relationships (such as that of employer and employee) may also, at least in modern times, involve obligations of trust and confidence (Malik v B.C.C.I. [1998] A.C. 20). The existence of such obligations is not, in my view, inconsistent with an obligation on the parties to exercise reasonable care in all the circumstances to avoid damaging the financial interests of each other. In an admittedly somewhat different industrial climate the House of Lords had no difficulty in holding (unanimously on this point) that a skilled employee in general owed a contractual duty of reasonable care to his employer in the performance of his employment (Lister v Romford Ice & Cold Storage Co Ltd [1957] A.C. 555). So far as I am aware, that view had not been questioned in the more recent industrial climate. Of course and for good practical reasons, the situations will be relatively rare when an employer will seek to recover from his employee loss occasioned by vicarious liability incurred to a third party by reason of the act or omission of the employee. The same is likely to be the case in the context of partnerships. But the circumstance that the right is rarely exercised does not import that it does not exist.
[32] As earlier noticed, the pursuers' case is laid both on breach of contract and on delict but it was not suggested that any material distinction falls in the circumstances to be made between those grounds of action.
[33] Mr Thomson criticised the pursuers' pleadings in respect of their primary case as effectively equiparating duties owed to the Building Society with those owed to the firm. There is some force in that criticism. I was, however, invited on this aspect, having formed a view, to put the case out By Order before making a substantive order. I shall do so.
[34] With respect to the second principal issue Mr Thomson submitted that any liability which might otherwise have arisen on the defender to the firm was excluded by the Agreement. The defender had agreed to purchase certain assets of the business previously conducted by the firm from 76 Causeyside Street, Paisley. These did not include any goodwill associated with the firm name, only "heritable" goodwill; nor did the purchase involve the assumption of any of its debts. The Agreement also dealt with various financial matters, including the defender's share of profits, his tax liability and the deficit on his capital account. It was designed to bring to a close all issues, except in so far as expressly excepted, arising from the prior partnership relationship and to be the sole measure of the parties' mutual rights and obligations thereafter. In that context clause 18 constituted a mutual and exhaustive release of all claims competent to either party against the other except as set out in the Agreement. There was no question of a continuing relationship between the parties to be regulated by exclusion or indemnity clauses. Accordingly, the line of authority commencing with Canada Steamship Line Ltd v The King [1952] A.C. 192 had no application. In these circumstances the only claim which might have been open to the firm was one under clause 8.2.2 (in relation to a liability arising from professional misconduct by the defender); but plainly no such claim (a well recognised category - X Insurance Co v A and B 1936 S.C. 225, E v T 1949 S.L.T. 411, Sharp v The Law Society of Scotland 1984 S.C.129) was made in the present action. The particular exception for professional misconduct might have arisen because of the requirement, under the Law Society Master Policy Scheme for Professional Indemnity Insurance, that the insured take all reasonable steps to recover any loss arising from such misconduct. In any event, clause 8 provided the parties with reciprocal indemnities against each other. Pursuit by the firm of the present claim was inconsistent with that provision. Moreover, the particular exception in each sub-clause for professional misconduct met any argument based on the Canada Steamship line of authority; in effect professional misconduct encompassed serious forms of negligence and negligence accordingly had been expressly dealt with. In any event, the expression of a sole exception to the indemnity imported the exclusion of all others. Clause 8, as read with clause 3, excluded the present claim.
[35] Mr Upton submitted that the Agreement was not apt to exclude liability for negligence (whatever the requisite standard of care). He relied on the propositions enunciated by Lord Morton of Henryton in Canada Steamship Line Ltd v The King. He also referred to, among other authorities, Smith v U.M.B. Chrysler (Scotland) Ltd 1978 S.C. (H.L.) 1, Lewison - The Interpretation of Contracts (2nd edition) at pp.306, 314, 316, 320-1 and 335, North of Scotland Hydro-Electric Board v D & R Taylor 1956 S.C. 1 and E.E. Caledonia Ltd v Orbit Valve Co Europe [1993] 4 All E.R. 165, especially per Hobhouse J. at pp.173-4. None of clauses 3, 8 or 18 was apt to exclude the relevant liability. As regards clause 3, first, it contained no express reference to negligence or the consequences of negligence and clearly had other content; secondly, no question arose of any assumption or deemed assumption of any obligation, the obligation in question being an original obligation of the defender; and, thirdly, this was not an obligation incurred by or on behalf of the firm. This clause had no relevance to an obligation which had not appeared until well after the date of the Agreement. As regards clause 8, it contained no express reference to negligence and had ample content otherwise. The circumstance that professional misconduct was expressly excluded from clause 8.1.1 did not import that negligence was included in the indemnity. At best for the defender there was a doubt whether it was so included, which was sufficient to resolve the matter against him. The Master Policy was of no relevance to the interpretation of the Agreement. It would be surprising if the parties had intended by the Agreement to exclude claims as between themselves for negligence; the result would be that if an aggrieved client chose to sue the defender in respect of professional negligence caused by another partner the defender would have no remedy against the firm. As regards clause 18, if its purpose was as contended by Mr Thomson, its effect was to operate as an exclusion clause which fell to be tested by the principles in Canada Steamship and Smith; it failed the relevant tests. Reference was also made to Atlantic Shipping and Trading Co v Louis Dreyfus & Co [1922] A.C. 250. In any event, clause 18 referred only to claims existing as at the date of the Agreement. The present claim did not then exist. Mr Thomson's contention that the Agreement as a whole operated as a discharge of the present claim was misconceived. Reference was made to Erskine - Institutes III, 4, 9, Wilson on Debt at pp.154-5, Gloag on Contract (2nd edition) at pp.722-3 and Lyall v Edwards (1861) 6 H&N 337.
[36] The claim with which this action is concerned is based in law on an alleged breach by the defender of an implied obligation of the co-partnership agreement to which he was a party in a period covering August 1990; it is additionally based in law on an alleged breach of a duty of care at common law owed by the defender to the firm of which he was then a partner. The conduct giving rise to these alleged obligations occurred prior to 3 May 1991, the settlement date under the Agreement, but as at that date no claim such as is made in this action had been, nor in practical terms could have been, made by the pursuers against the defender. No ascertainable damage was sustained by the Building Society until some time after November 1992. Proceedings against the firm were not brought by the Building Society until January 1997, though conceivably an extrajudicial claim against it may have been made at some time between those dates. The pursuers did not sustain actual loss until some time thereafter when they had to meet the uninsured element of that claim. It is against that historical background that it is necessary to determine whether the present claim is excluded by the Agreement.
[37] In my view, none of the contractual terms relied on by the defender, read in each case against the context of the Agreement as a whole, has that effect. Clause 3 neither in its terms nor, in my view, having regard to its purpose is apt to exclude the present claim. It is designed, for the avoidance of doubt, to prevent any debt, obligation, liability or other responsibility of the firm prior to the settlement date under the Agreement being assumed or deemed to be assumed by the defender or becoming his responsibility. It accordingly posits the existence prior to that settlement date of some debt etc. of the firm and of circumstances subsequently arising which, but for this clause, might give rise to such assumption, deemed assumption or transfer of responsibility. The present claim is not of that character. It does not comprise "any debt [etc.] ... incurred by or on behalf of the Vendors prior to the settlement date" which the defender is claimed to have assumed, been deemed to have assumed or have become responsible for. It is, by contrast, a direct claim by the pursuers against the defender arising out of or in the context of the partnership agreement and made after the settlement date. The clear purpose, in my view, of clause 3 is to avoid any possibility of the application of the presumption (referred to in Thomson & Balfour v Boag & Son 1936 S.C. 2 at p.10 and in earlier authorities and applied in relation to solicitors in Miller v MacLeod 1973 S.C. 172) to the effect that, when the whole assets of a going concern are handed over to a new partnership and the business is continued on the same footing as before, the liabilities are taken over with the stock. There may have been compelling reasons in any event why such a presumption should not apply or should be rebuttable in the circumstances of the defender taking over and continuing the practice hitherto carried on by the firm at 76 Causeyside Street; but, for the avoidance of doubt, the parties to the Agreement prudently made express provision to exclude it. This clause has, however, in my view, no application to the present claim.
[38] As regards clause 8, it is not submitted that it in express terms excludes the present claim. The submission is that the latter cannot stand with the provision for indemnity in clause 8.1 since under that clause the firm would be obliged to indemnify the defender in respect of the very claim which it brings against him. Clause 8.1.1 is expressed in somewhat compressed terms but, having regard to the counter-indemnity in clause 8.1.2, I read it as an indemnity against "any and all losses, costs, liabilities and expenses arising out of, or in connection with, the ownership of the Assets or [the carrying on of] the Business or the Firm prior [to] the settlement date ...". The submission of the defender is in effect that, if he had been individually sued by the Building Society for its loss in respect of the loan transaction and had met that claim, he would have been entitled under clause 8.1 to be indemnified by the firm against that loss. I am unable to accept that submission. On the premises on which the present action proceeds the loss for which on that hypothesis the defender would have been found liable proceeded not only from conduct which involved professional negligence by the defender in a question with the Building Society but also gave rise to breaches of obligations of care owed by him to the firm. Clause 8.1 would not, in my view, have been apt to entitle the defender to indemnity from the firm in respect of such a liability. The circumstance that an express exception from the indemnity is made for losses arising from a complaint by a client for alleged professional misconduct does not, in my view, in the present context import that the indemnity extends to all other losses arising from the carrying on of the Business. While the express exception is an element to be taken into account in construing the clause as a whole, it does not disapply the principles of construction laid down in Canada Steamship and subsequent authorities. Professional misconduct is a well recognised concept. It may involve deliberate action and in some circumstances negligent acts or omissions of a particular quality; it is amenable to professional discipline. But the fact that professional misconduct can in some circumstances involve negligent conduct does not mean that the clause expressly deals with negligence which does not amount to professional misconduct. It expressly excludes indemnity for conduct amounting to professional misconduct; it makes no express provision for negligence not so amounting. In view of the principles of constriction laid down in Smith and other authorities, the clause cannot readily be construed as embracing such negligence within the scope of the indemnity. In any event, whatever the position in relation to losses arising out of conduct which simply involved professional negligence in a question with a client (as to which it is not strictly necessary to express an opinion), losses which in turn further amount to a breach of the obligation of due care owed to the firm are not, in my view, encompassed within the clause 8.1 indemnity. Accordingly, the existence of such an indemnity is not, in my view, inconsistent with the pursuers' maintenance of their present claim.
[39] As regards clause 18, it is clear that the parties intended to record that they had no claims against each other except those set out in the Agreement. In a sense accordingly the clause imports a settlement of any claims. However, it likewise plainly concerns only claims which might have existed (and thus might have been confirmed) as at the date of the Agreement. It does not in terms extend to future claims. Clauses which involve a discharge of future as well as of existing claims are not unfamiliar. Had the parties intended to discharge each other of future claims, they could readily have done so. In the event they did not. Accordingly clause 18 (which, although not referred to in the defender's pleadings, was in the forefront of Mr Thomson's submissions on this aspect of the debate) does not, in my view, assist the defender.
{40] For the foregoing reasons I shall sustain the pursuers' fifth plea-in-law to the extent of repelling the defenders' two pleas (pleas 2 and 3) which rely on the Agreement. I shall put the case out By Order to consider further procedure in light of my views on the first principal issue.