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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Clark & Ors v Messrs Shepherd & Wedderburn & Ors [2000] ScotCS 2 (7 January 2000)
URL: http://www.bailii.org/scot/cases/ScotCS/2000/2.html
Cite as: [2000] ScotCS 2
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OUTER HOUSE, COURT OF SESSION
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OPINION OF LORD BONOMY
in the cause
ADAM MURRAY CLARK and OTHERS
Pursuers;
against
MESSRS SHEPHERD & WEDDERBURN and OTHERS
Defenders:
________________
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Pursuers: Hodge Q.C., MacSporran; Skene Edwards W.S.
Defenders: C. Campbell Q.C., Hanretty; Dundas & Wilson C.S.
7 January 2000
THE BACKGROUND
Tom Gray died on 4 January 1992. His death was the trigger for the sequence of events which are the subject matter of this unfortunate litigation. The crucial events occurred over a period of days in January and then over a period of hours on 30 April. The statements made and recorded then and during the subsequent five years were meticulously dissected and analysed by two teams of distinguished lawyers, on the face of it to determine whether the pursuers, who in fact profited handsomely from the transaction they entered, would have earned just as much at far less cost to themselves but for the negligence of their legal adviser, a partner of the defenders. Perhaps as the result of the passage of time and the inevitable process of rationalisation of events distorted by the rose coloured spectacles of retrospect, the approach of both parties included attempts to reconstruct history from documents in the best possible light for their respective cases and occasional attempts to put quite untenable interpretations upon statements recorded in documents. In the end, however, there were certain things said and done at and after the crucial time which spoke volumes about the state of mind and state of knowledge of the parties, which are crucial to the determination of the case and in respect of which neither was prepared to make a sensible concession.
Tom Gray was a Messenger-at-Arms, Sheriff Officer and entrepreneur. In association with others he built up substantial debt recovery and debt collection businesses. Although he had been retired for a number of years and spent a large part of each year abroad, he kept himself informed about his businesses. Because of his pivotal role in the creation and development of the businesses, he retained a controlling interest in each. While regular thought was given by him and those advising him to providing for the succession to his interests, no firm arrangements therefor were in place at his death. There was apparently a testamentary deed since there was evidence of executors nominate being confirmed, but the terms thereof were not explored.
The subject matter of this action was the firm of Messengers-at-Arms and Sheriff Officers known as Gray Scott & Co. It was highly profitable. Tom Gray and his son Nelson together received 771/2% of the profit share, of which Tom Gray's proportion was either 521/2% or 621/2%. The pursuers Adam Clark and George Thomas were profit sharing partners entitled to 15% and 71/2% respectively. The pursuers David McLaughlin and Michael Donald were salaried partners.
The death of Tom Gray dissolved the partnership. At that date there stood at credit of his account in the business about £917,000 - the exact figure varied in the adjustment of accounts, but was always around that figure. In the days following his death a new partnership was constituted to preserve the integrity of the business pending negotiations over the long term future of the business. The partners of the interim firm were the surviving partners and Tom Gray's widow, Mrs Doreen Gray. Just over three months later, on 30 April 1992, Mrs Gray and Nelson sold their interest in "the business of Gray Scott & Co" to the pursuers at a price of £1.042 million. A rash of litigation between the "Gray Family" on the one hand and the pursuers on the other hand over the consequences of the sale agreement ensued. About four and a half years after the agreement was entered into these actions, including in particular the claim of Tom Gray's executors for the capital balances at his account on death, were settled by payment by the pursuers of £1 million. The pursuers claim that, in acting for them and advising them on the deal to purchase the interests of Mrs Gray and Nelson, the defenders as their legal advisers should have alerted them to the fact that the executors' substantial claim had not been discharged and of the potential consequences for them of that. Had they done so the pursuers would have left and set up their own new business and the interim partnership would have been dissolved. That business would have been just as profitable as the business they secured by the deal. Their outlay on the other hand would have been far less. They claim the difference.
There are a number of issues between the parties; some important elements of the factual background; the capacity in which the defenders were acting; whether the defenders were in breach of contract and/or negligent; whether their failure caused loss to the pursuers; whether the claim of each of the first three pursuers was for loss sustained by him; and the quantification of loss.
EVENTS OF 4-24 JANUARY
Immediately following Tom Gray's death the pursuers were uncertain about their future and the future of the firm. They considered that they and Nelson were the surviving partners of the firm. There was no partnership agreement. Relations between the pursuers and Nelson were poor. Their uncertainty stemmed from anxiety at the conduct of Nelson Gray and the deceased's wife both before and after Tom Gray's death. They had given the impression to the pursuers that, following an accident he had had some weeks before, Tom Gray was on the mend; it was a disturbing surprise to the pursuers to learn that he had probably never recovered consciousness between then and his death. After the funeral a close friend of his, Professor John Small, visited the first named pursuer Adam Clark. Both were executors nominate of the deceased. Small invited Clark to sign a letter which he had prepared resigning as an executor because there were rather too many executors and this would simplify the realisation of the estate. Clark readily did so. He was then presented with a letter from Doreen Gray asserting her determination to take over her deceased husband's role in the business and inviting Clark to join her in continuing to run the business. Letters in more or less identical terms were sent to the other partners at the same time. She was in effect asserting a proprietorial claim over the business and inviting the others to co-operate in running it.
The pursuers realised that they needed sound legal advice on their position quickly. On 16 January they went to a solicitor in Dunfermline whom Clark knew well. At that time the annual profit of Gray Scott & Co was about £5 million. He realised immediately that the issues involved required advice from an expert in partnership law working in a firm with sufficient resources to devote staff instantly and for as long as necessary to this particular issue. He contacted the defenders and in particular Ian MacLeod, a partner specialising in this field, and the pursuers met with him that very day.
At that first meeting, on the strength of what the pursuers told him about the business relationship, Mr MacLeod confidently and correctly asserted that they had been in partnership with the deceased and his son and that the partnership was dissolved by his death. Mr MacLeod's conviction of that never wavered throughout subsequent discussions and is a good example of the confidence, born of knowledge and experience of this field, with which he was able to tackle the issues raised. It follows, as night follows day, that Mrs Gray as the deceased's widow had no business relationship with the pursuers. Mrs Gray's letters to the other partners were never seen by Mr MacLeod as a justified assertion of a right on her part. He always viewed her as presenting a practical rather than a legal problem for the pursuers.
Having given the pursuers welcome reassurance about the nature of the relationship, Mr MacLeod undertook to explore the medium to long term future of the business with the solicitor acting for Mrs Gray and Nelson, Mr McIver of Bird Semple Fyfe Ireland, and to raise with him the temporary continuation of the business on the basis upon which it existed prior to Mr Gray's death.
It is plain from subsequent events that, although the pursuers were the partners most closely in touch with the day to day running of the business and Nelson's role was much more accounting and administrative and Mrs Gray's non-existent, Nelson Gray was capable of significantly disrupting the smooth running of the firm's business to secure his own objectives were they to be different from those of the pursuers. Mr MacLeod was well aware of the potential of any disaffected partner of a dissolved firm, in which the surviving partners were not at one as to how to continue the business, to undermine or even destroy the business by concentrating on securing his own ends in a way that forces the other partners to concentrate time and energy on defending their own interests, thus causing all to lose sight of their common objective of maintaining the source of their common wealth. So, when Mr MacLeod that day spoke with Mr McIver and a few days later met him, he was concerned not only to discuss the medium to long term future of the business but also to negotiate with him an immediate arrangement satisfactory to both sides for the short term continuation thereof. The deceased's profit share had been 521/2% or 621/2%. Nelson Gray's share was 15% or 25%. While the extent to which Mrs Gray was the beneficiary of her husband's estate was not explored, it was clear that Bird Semple were acting against a background in which she had the prime financial interest. They were instructed by her and Nelson and also by her husband's executors. In Mr MacLeod's discussions with Mr McIver reference was made to Mrs Gray taking over her late husband's position or "stepping into her late husband's shoes". It is likely that phraseology was first used by Mr McIver. It was in any event adopted by all involved. The phrase was first used in the context of Mr McIver asserting Mrs Gray's interest to replace her husband as proprietrix of the business. She would simply step into his shoes. However in the discussion which followed that proposal it was also used to describe the role of Mrs Gray in the short term. There was some dispute between the parties about whether she was simply foisted on the pursuers by agreement between McIver and MacLeod who, according to the pursuers, had no specific instruction to reach such an agreement. It is in my opinion unlikely that Mr MacLeod would reach such an agreement without instructions. In any event the exact circumstances in which that short term agreement was made are of no consequence. Mr MacLeod was of the view that a short term arrangement was necessary to secure the ongoing success of the business and, whether by taking his advice and giving him positive instructions in response thereto or by adopting the agreement which they claimed he had presented to them as a fait accompli, the pursuers accepted that the way forward in the short term was to continue as before with her in place of her husband. That situation was accepted by the pursuers by at latest 24 January.
THE INTERIM ARRANGEMENT
Arising out of this is the first issue which requires determination. It was part of the pursuers' case, not only that Mrs Gray was imposed upon them as a partner for reasons which they could not understand, but also that in explaining the effect of the arrangement Mr MacLeod advised that she would assume both the profit sharing and capital position of her late husband. The latter point was based on the recollection of Mr McLaughlin. None of his three colleagues spoke to that, although Mr Clark did say that that was his "understanding". However, Mr McLaughlin's evidence does not survive comparison with an account he gave of these events around December 1993. At that stage he prepared a very lengthy memo in response to a Minute of Amendment in other litigation at the instance of Tom Gray's executors. In the course of that memorandum he referred to him and his colleagues agreeing, albeit reluctantly, to accept Mrs Gray as a partner in her late husband's stead until a way forward could be found. That account is not consistent with his evidence to the effect that Mr MacLeod reached agreement to that effect without instructions. There is no reference in the memorandum to Mr MacLeod explaining that the arrangement was that Mrs Gray would take over the position of her husband both in relation to income and capital or that she would introduce the equivalent of his capital into the new firm. Mr McLaughlin explained that the memorandum was compiled in a hurry around Christmas-time. Yet it is packed with detail and was compiled by the man who at that time was the pursuers' main contact with Mr MacLeod and had encyclopaedic knowledge of the history of the matter. Indeed in a letter to Mr MacLeod on 11 January 1996 he said of the memorandum, "...I spent a great deal of time and effort in preparing a comprehensive resume of the events ...". Standing these inconsistencies, I did not find his evidence that Mr MacLeod gave such advice convincing. I shall deal later in this Opinion with Mr McLaughlin's actings in May 1992 which are also inconsistent with his evidence on this point.
Mr Clark, who was the only other pursuer with any material recollection of these events, was much more concerned about the very fact of the involvement of Mrs Gray at all and did not speak to any discussion about the capital position. Mr McIver was clear that he was never instructed to agree to a transfer of capital. Mr MacLeod was adamant that he gave no such indication to the pursuers and that there was no such agreement. That evidence did not sit comfortably with the position Mr MacLeod adopted in the litigation with the executors referred to above. In consultations and discussions in connection with that litigation he repeatedly asserted that the effect of the agreement reached was to put Mrs Gray in her husband' shoes in respect of both income and capital. I shall require to return to that later in this Opinion, but for the moment observe that that later position was inconsistent with Mr MacLeod's actions and writings between May and October 1992. And even when he asserted that there was transfer of capital Mr MacLeod on occasions based that on an "understanding" and on a "notional transfer" rather than on any specific agreement. On one point all the material witnesses were agreed. The intention was that the arrangement made to continue the business ad interim was expected to endure a matter of days, weeks at most, and was to preserve the integrity of the business pending discussion on an arrangement for the medium to long term future. Such a short term arrangement is inconsistent with a specific agreement about capital. What mattered in the short term was that the business should remain stable, that clients should experience no disruption and that the business should continue to produce the same handsome income.
In my opinion it is unlikely that Mr MacLeod said in January that the temporary arrangement involved Mrs Gray assuming her late husband's capital position. On the other hand it is easy to see how such a contention did arise as a point favourable to the pursuers' defence of the other litigation. Again I shall deal with that in more detail later. For the moment however it is sufficient if I observe that, albeit Mrs Gray, Nelson Gray and the pursuers all fully appreciated that the partnership of Gray Scott & Company was dissolved with effect from Tom Gray's death on 4 January and that what they had agreed to do was form a new partnership, they in fact treated the "business" as a continuing business and operated the same bank accounts and used the same equipment and resources as heretofore. In addition there was an attempt by the Grays around the time of Mr Gray's death to withdraw £600,000 from the firm. The fate of that money and how an identical sum came to be re-introduced into the firm's bank account after January did not become clear in the course of the proof. Draft accounts for the interim partnership between January and April credited Mrs Gray with an opening capital balance equal to one of the capital sums at credit of her deceased husband's account on his death. However, these draft accounts were produced after 30 April and were not a factor in the minds of the pursuers during the period January to April.
There is accordingly no basis made out by the pursuers for believing that Mrs Gray had assumed as part of her interest in the partnership from January to April the capital at credit of her husband in the dissolved partnership, thus discharging the executors' claim for his capital. What emerged was an arrangement reluctantly entered into by the pursuers that they and Nelson Gray would continue as before and Mrs Gray would join them in partnership with entitlement to the very substantial share of profits previously enjoyed by her husband.
NEGOTIATIONS ON FUTURE OF BUSINESS
A meeting among the pursuers, Mrs Gray and Nelson and their respective legal advisers took place on 29 January. The bitterness between the pursuers and the Grays was such that they did not communicate. The solicitors agreed that a partnership agreement for the longer term would be drafted by Mr McIver's firm and forwarded to Mr MacLeod for consideration by the pursuers. The pursuers envisaged Mrs Gray having a majority financial interest but no power to exercise day to day control over the management of the firm and her and her son having no more than an equal say with them in major policy decisions.
So within weeks of Mr Gray's death the parties had reached agreement in the short term to continue the business as before with Mrs Gray having stepped into her husband's shoes, and their lawyers had discussed in broad terms a partnership agreement involving Mrs Gray having a major financial interest. The agreement and the proposal were plainly the result of the recognition by experienced lawyers of the benefit of compromise which aimed to achieve a practical result that would satisfy both camps. Mrs Gray, who sought to establish her position as proprietrix, would have the major financial share. The pursuers, who sought to assert their right to manage the business, would be in control of day to day matters, and all partners would have an equal say on major matters.
One other issue arose in the context of the way in which matters progressed to this stage. That was whether Mr MacLeod ever explained to the pursuers the law about the effect of the death of a partner and the rights and obligations of the surviving partners. The pursuers were all along aware that the firm was dissolved by the death of a partner, and that they were free to walk away and establish their own independent new firm and to endeavour to secure the business of the Gray Scott & Co clients. Mr MacLeod said that at the first meeting on 16 January he had explained the law in some detail with the Partnership Act 1890 spread out before them. That was of course before he had spoken to McIver on the telephone, before the interim arrangement was made and before the parties had met at the end of January and agreed that McIver's firm would draft a new agreement. If Mr MacLeod did as he said and explained the law on 16 January, which was denied by three of the pursuers, that was plainly done in general terms, almost in an academic context, since there were no decisions to be made that day. Even by the end of January the developments in the pursuers' circumstances were such that, if knowledge of any point of partnership law was required for a decision to be made, it would have been incumbent upon any legal adviser of the pursuers to explain the point to them. In Mr MacLeod's evidence there was little detail about the particular points of the Act which were covered. I do not find it necessary to determine whether or not the pursuers were given advice in general terms about the effect of the Act in their circumstances at that stage since, even if they were, that advice could not possibly be said to be adequate advice to enable them to make fully informed decisions on the terms of a proposed agreement on 30 April, which was quite different in its effect from a number of proposals considered in the intervening period. This is an important finding in light of Mr MacLeod's acknowledgement that he did not on 30 April discuss with the pursuers the legal effect of the offer which they accepted.
From the end of January until the end of March progress was, when compared with events in January and in the last week of April, fairly leisurely. Two draft partnership agreements were prepared and sent for consideration by the pursuers in February and March. Both were rejected because the Grays continued to insist on having a degree of control over the partnership business that the pursuers found unacceptable. That finding, and any other I have made about the position of Mrs Gray and Nelson on any matter, is based on what was written by or on behalf of either and on inference from other evidence since neither was a witness.
The second draft was the subject of discussion at a meeting between the pursuers and Mr MacLeod on 26 March. Following that meeting with conspicuous clarity Mr MacLeod wrote to Bird Semple presenting them with simple alternatives in these terms:
"I am.... asked by my clients to put a very simple question to Mrs Gray and Mr Nelson Gray which is:-
Are Mrs Gray and Mr Nelson Gray prepared to enter into a Contract of Partnership with Mr Clark, Mr Thomas, Mr McLaughlin and Mr Donald?
If the answer to that question is in the affirmative then I will be very happy to prepare a draft of a proper Partnership Agreement. Such... would ... remove any concept of a 'principal partner'... .
If your clients are prepared to enter into a true Partnership on these terms rather than what remains a vaguely disguised Contract of Employment then my clients will be very happy to proceed in the hope that thereby the Firm of Gray Scott & Co can continue.
If, however, your clients' answer to the question is in the negative then it seems that there is now absolutely no alternative to a dissolution of the present Partnership at Will with preparation of Termination Accounts as at the date of death of the late T. C. Gray and separate Termination Accounts as at the date of dissolution of the present Partnership at Will and if necessary, of course, the appointment of a Judicial Factor to oversee the dissolution of the Firm and the distribution of its assets."
The terms of that letter show that he had clearly in mind the consequences of failure to agree, namely that accounting would be necessary in respect of two quite separate partnerships, the original with the late T. C. Gray and the interim with his wife. The choice for the Grays was a simple one. As subsequently emerged there were other possibilities, but none had arisen for discussion by this stage.
NOTICE OF DISSOLUTION
The pursuers were aware that these were the alternatives presented. In the absence of a prompt response they began to make plans to establish their own independent business, assuming that there would be a dissolution. In making their plans and executing them they demonstrated exceptional organisational ability. By early in the second half of April they were well on the way to acquiring alternative premises and necessary equipment. There were also signs that they might engage inappropriately in dialogue with staff of the firm. Mr MacLeod advised them that no steps to discuss future business with existing clients or recruit existing staff should be taken until a notice of dissolution had been served. That was done on 24 April for dissolution at midnight on 30 April.
While in the days following service of the notice of dissolution initiative and organisational flair produced remarkable success for the pursuers in establishing their own new business, dogged persistence and determination remained the distinctive features of the Grays' efforts to secure what they appeared t continue to regard as their proprietorial interest in the business. In the February and March negotiations they gave little ground in relation to administrative control in spite of the willingness of the pursuers to accept that they should hold the majority financial interest in the firm. They did not regard the alternatives presented by Mr MacLeod as the only possibilities. They endeavoured to maintain their position by creating the impression among clients that they would continue to operate the business on their own or in conjunction with new associates. However, Nelson Gray was so out of touch with the day to day running of the business that he was unable to prevent the pursuers in the course of that final week in April from securing the commitment of 60% to 70% of Gray Scott & Co's client base for their proposed new firm.
The clients secured were the major clients of the business, such as most of Scotland's regional authorities, the Inland Revenue and Customs and Excise. The pursuers were aiming to commence trading on 1 May and they were pleased at their measure of success in securing the commitment of existing important clients. They were also encountering significant support among staff. On top of that on 28 April the Grays for the first time showed signs of wilting by indicating willingness to discuss the take over of at least part of the business by the pursuers. Nevertheless, the pursuers as a group remained anxious to respond to any overture and continue to negotiate for an agreement on the future of the business. In addition they continued to see Nelson Gray as a threat. It is significant that, as the deadline of midnight on 30 April approached and events began to pick up pace, the trigger for contact between the pursuers and Shepherd & Wedderburn in the morning of 30 April was the pursuers' desire to be advised about the possibility of obtaining an interim interdict against the Grays' last ditch efforts to persuade staff and clients to stay with "Gray Scott & Co" under which banner they had declared that they intended to continue the business. Right to the end the pursuers saw Nelson Gray as more than a nuisance; they saw him as a potential source of disruption of their new business the effect of which they could not gauge. As matters came to a head the pursuers were inevitably on edge and anxious about the extent to which Nelson Gray might undermine their efforts to effect a smooth transition into a new business retaining the bulk of the major clients.
NEGOTIATIONS FOLLOWING NOTICE OF DISSOLUTION
On 27 April Mr MacLeod met Mr Gardiner of Bird Semple to discuss various consequences of dissolution such as the position of staff and work in progress. They also discussed an idea that had earlier arisen at the Grays' suggestion that the pursuers might simply receive a lump sum to leave, but in view of the pursuers' success in securing the existing clients that discussion took place in the context of leaving the remaining rump of the practice. Mr Gardiner undertook to be in touch. He contacted Mr MacLeod by telephone on 28 April to indicate not that his clients might pay the pursuers but that an idea, which had been discussed on 23 April between the Grays and the pursuers, that the pursuers might acquire the business was still a possibility. Mr MacLeod was instructed to make a proposal. He wrote to Bird Semple making what he described in the letter as a proposal to acquire "only a part of the business of Gray Scott & Co". The features of the proposal were that the pursuers would take leases of the majority but not all of the business premises occupied by Gray Scott & Co and owned by a company controlled by the Gray family, that they would employ all the staff, that they would take over all work in progress, and that they would acquire the fixed assets of Gray Scott & Co at their current net book value on the basis that the consideration would be paid over a period of three years. The deadline for acceptance was the following morning. That letter was written following at least two telephone conversations between Mr MacLeod and Mr Gardiner, a telephone discussion with the pursuer Mr McLaughlin, a meeting with the pursuers Clark and McLaughlin and a further telephone discussion with Mr Gardiner during that meeting. When on the morning of 29 April the proposal in the letter of 28 April was rejected, Mr MacLeod listed the various subjects he considered that he and Mr Gardiner should be discussing to bring the business of Gray Scott & Co to a conclusion on 30 April. Later that day Mr MacLeod met Mr Thomas and discussed further steps that might be taken towards negotiating settlement. Thereafter he had a number of telephone discussions with Mr Gardiner and Mr McLaughlin.
EVENTS OF 30 APRIL
Against that background it would have been surprising had there been no further communications between the pursuers and defenders on 30 April. As it turned out these communications were not initially with Mr MacLeod and were not initially about taking over the business or any part of it. Mr MacLeod was involved at an industrial tribunal. In his absence his secretary and then his partner, Mr Donald, dealt with the pursuers' concern about steps taken by the Grays to intimate to clients and staff that the business would be continuing in the name Gray Scott & Co and that the partnership would not be dissolved. The pursuers sought advice on obtaining an interdict. Mr Donald took the matter up with Mr Gardiner and in the course of conversation was told of the Grays' counter proposal in response to the letter of 28 April. That involved longer leases on terms more favourable to the Grays and the taking over of the whole business including the name Gray Scott & Co, although Gray would be dropped therefrom shortly thereafter. The proposed price was 20% of operating profit excluding interest received or paid and salaries to partners; that price was to be paid over the three year period proposed in the letter of 28 April for payment of the price of the fixed assets. An additional matter, which had been discussed before but not mentioned in the letter of 28 April, was the final element - a licence arrangement in regard to software written by Mr McLaughlin of the pursuers and widely used in the business and associated businesses owned by the Grays. When the pursuers discussed these proposals with Mr Donald, payment of a licence fee for the software was an obstacle, but payment by way of 20% of profit was accepted in principle and a modification of the lease arrangements was proposed. Mr Donald was unable to convey the pursuers' reaction to Mr Gardiner before briefing Mr MacLeod on events on his return to the office late that afternoon.
THE MISSIVES
Shortly before 5.00 p.m. the defenders received a formal faxed offer dealing with the various maters which had been the subject of discussion with Bird Semple. The heading was "Gray Scott & Co", the name used by the original partnership and the interim partnership. The offer was on behalf of Mrs Gray and Nelson Gray. It was to sell "our clients' whole beneficial interest in and to the business of Messengers-at-Arms and Sheriff Officers" on various terms and conditions. The price was to be "20% of the operating profit of the business as carried on by your clients hereafter ... disregarding any interest credited or interest paid and before deduction of any salaries paid to partners or any fees or salaries payable or costs incurred to any third party in connection with any software development in respect each of the three financial years immediately following", subject to a minimum of £500,000 in the first year, £300,000 in the second year and £200,000 in the third. The pursuers would take leases of nine premises for ten years with a break option in favour of the pursuers after five. The pursuers would employ all staff. A clause provided a scheme for accounting and resolving disputes thereanent. The same clause provided a means for resolving the dispute over ownership of the software and ensured that the debt collecting company Collection Agencies Limited, owned by the Grays, and the pursuers would both be able to use the software without charge. For many years Gray Scott & Co had been acting on the instructions of Collection Agencies Limited to recover debts. There was a special feeing arrangement which resulted in the deferral of fees payable by Collection Agencies Limited to Gray Scott & Co. It was a condition of the offer that the pursuers would waive any claim thereto. There was a clause indemnifying the Grays from claims arising in respect of the business referable to any date prior to or after 1 May 1992 when the sale was to take effect. The same clause provided for the parties to co-operate with each other in structuring payment of the consideration and all other matters related to the transfer of ownership of the business to mitigate the tax liability incumbent on the pursuers, the sellers or the estate of the late T.C. Gray. The pursuers did not rely on the reference to the estate as supporting their case. That particular clause also provided that the pursuers would acquire the business with effect from 1 May 1992 "in good faith and as a going concern". The final provisions were that the pursuers would accept and approve the accounts of the business brought down to 4 January 1992 and would enter into any agreements necessary to implement the deal of which the offer terms were simply an abbreviate account.
The offer reflects to some extent the position taken by the pursuers in discussion with Mr Donald. That suggests that there was some discussion of the terms in the course of 30 April between the time when Mr Gardiner spoke to Mr Donald and the fax arrived. That would be consistent with the vague evidence of events at India Buildings, Victoria Street, the base of the various Gray enterprises. The pursuers were present there in a part of the office quite separate from that in which the Grays were located. The sides never spoke directly throughout the day and evening. In the course of the morning and afternoon solicitor Francis McConnell and chartered accountant Kevin Rennie, both of whom were confidants of and personal advisers to the Grays, separately had conversations with one or more of the pursuers about the situation. Indeed over the preceding three or four weeks after the question of dissolution of the partnership was raised in Mr MacLeod's letter of 26 March the pursuers as a group and occasionally individually had conversations with others employed by or representing the Grays or having an interest in the well-being of the business empire about the future for both sides on a tentative basis. Any discussions on 30 April prior to 5pm were in similar tentative vein.
The fax crystallising the position of Mrs Gray and Nelson Gray triggered a flurry of activity. It was relayed by Mr MacLeod to the pursuers at India Buildings. McConnell and Rennie thereafter relayed messages between the parties. They made no pretence of advising the pursuers. They claimed to be honest brokers in the negotiations. Certainly the pursuers did not regard them as any more than messengers. In evidence, however, neither was able to identify specific terms on which they relayed the parties' position. It is likely that the subsequent faxes reflect at least some of the discussions in which they played a part. Both sides were in telephone contact with their respective legal advisers. The pursuers had a number of discussions between 5pm and 8pm with Mr MacLeod and regarded him as their legal adviser in the negotiations.
Mr MacLeod faxed a qualified acceptance to Bird Semple. The first qualification provided that the Grays should write to all clients of the business clarifying that the business would continue without interruption under the new name of Scott & Co and that there would be a review of the price should any of the major clients not continue to do business with the pursuers. Other clauses provided that rent reviews under the leases should not be solely in an upwards direction, that work in hand for Collection Agents Limited would be returned to them unless they were to issue fresh instructions including arrangements for payment, and that the Grays would never practise as Messengers-at-Arms or Sheriff Officers. There was also inserted a clause in the following terms:
"Our clients will in addition acquire the fixed assets of the business at their current net book value on the basis that the consideration thereby payable will be paid by our clients to your clients by equal annual instalments over a period of three years."
When the pursuers saw a copy of the qualified acceptance including that clause they immediately contacted Mr MacLeod to delete it, since they did not intend to pay anything in addition to the 20% share of profit proposed. Discussions thereafter led to further instructions being given to Mr MacLeod to further amend the qualified acceptance. The clause relating to the letters being sent to clients and a review of the price was deleted. The proposed restrictive covenant was restricted to five years. Two further provisions were added: the initial offer was amended to make specific provision for the engagement of five members of staff; and a restrictive covenant on the pursuers undertaking debt collection work for clients of Collection Agencies Limited for five years was added. This amended qualified acceptance was accepted by Bird Semple, and shortly after 8.30 Mr MacLeod sent a copy of the acceptance to the pursuers with an expression of delight, "Whoopee!". From the following day the reconstituted business comprising a partnership, in which the first three pursuers were equal profit sharing partners and the fourth pursuer and another were salaried partners, traded under the name Scott & Co.
THE ROLE OF THE DEFENDERS
The first and basic issue I have to determine in relation to 30 April in the light of these facts is whether the defenders, through Mr MacLeod principally, were acting as legal advisers to the pursuers in the negotiation of the deal concluded in these exchanges of letters and faxes referred to by the parties before me as "missives" or whether he was on this occasion simply an amanuensis. On 30 April the pursuers viewed Mr MacLeod, as they had done throughout since 16 January, as their legal adviser acting on their behalf in negotiations with those acting for the Grays. The whole history of the circumstances in which the pursuers came to instruct Mr MacLeod, their initial dealings with him, their further involvement with him leading up to the service of notice of dissolution on his advice following the rejection of two draft partnership agreements, their subsequent consultations with him leading to the offer made on 28 April, the discussion thereof, the further discussions on 29 April, Mr MacLeod's regular communications and discussions on their behalf with Bird Semple, and the return to his office for his advice and assistance on 30 April leading to discussions between Mr Gardiner and Mr Donald which were followed in the early evening by the faxed offer all point to Mr MacLeod continuing to act as the negotiator and adviser he had been throughout. This time he had a written offer to consider with his clients. On occasions in the past he had draft partnership agreements to consider with them. He was not simply a glorified post box acting mechanically to pass messages back and forward from Bird Semple. I was surprised to hear Mr MacLeod suggest that that was his role. On the contrary, I was not at all surprised to note that his file entry for 30 April records this:
"Attendance at telephone on numerous occasions with Mr Gardiner of Bird Semple and Mr Clark, Mr Thomas and Mr McLaughlin in negotiation of an arrangement for the acquisition by you of the business of Gray Scott & Co culminating in an exchange of faxed letters supported by various telephone calls and finally reaching agreement at 8.30pm. Engaged in all say five hours".
That is what he charged for doing. There is no doubt in my mind that that accurately summarises the role he performed on 30 April.
A SOLICITOR'S DUTY OF CARE
What then were his duties? On this matter in the end there was nothing between the parties. Brief reference was made to the following, Duchess of Argyll v Beuselinck [1972] 2 Lloyd's Rep. 172, Esso Petroleum v Mardon [1976] 1 Q.B. 801, Midland Bank v Hett, Stubbs & Kemp [1979] 1 Ch. 4, Bolitho v Hackney Health Authority [1998] AC 232, Hunter v Hanley 1955 SC 200, and Jackson Powell on Professional Negligence (4th Ed) on the question whether a particular standard of care is expected of a solicitor having particular expertise or experience in the subject area. Nothing turns on that. Mr MacLeod is a solicitor whose experience and knowledge of partnership law and problems qualify him as an expert on that subject. However, in my opinion it would be incumbent upon any solicitor acting and advising in this area to comply with the duties which are relied upon in this case. They are basic and obvious. Although a number of solicitors gave evidence in the case, only David Williamson did so as an independent expert in the professional practice of a solicitor dealing with partnership problems. His evidence about the duties which matter in this case was plain and uncontroversial. In the first place the solicitor instructed must do as instructed or explain why he can't or won't. That duty would arise in the context of a specific instruction, if such there was, by the pursuers to Mr MacLeod that in the contract of 30 April they wished to achieve a once and for all settlement of all their potential liabilities to the "Gray family" in the widest sense. In the absence of a specific instruction of that nature the solicitor's duty is to implement the general instruction given, e.g. to acquire something. In doing so he should take reasonable care to see to it that in the preparation of an agreement matters adverse to his clients' interest which can reasonably be anticipated on a proper view of the law are adequately dealt with or that the client is advised that they have not been or cannot be dealt with. That involves being satisfied his clients understand the effect of an agreement entered into against a complex factual background, such as existed here, and in particular the limitations of the agreement. That duty extends to taking reasonable care to ensure that his clients are aware of the situation where something which reasonably foreseeably is an important element of the transaction in their minds has not been acquired or achieved. In my opinion it is to state the obvious to say that these are the duties of a solicitor especially in a situation where the basic terms of the contract are drafted by the other party. These duties arose here both as implied terms of the contract in terms of which the pursuers instructed the defenders and also in delict as a consequence of their relationship.
THE PURSUERS' INSTRUCTIONS
So how do these duties apply to the factual matrix of this case? I deal first of all with the question whether Mr MacLeod was instructed to, or understood that he was meant to, secure a one-off clean break deal disposing of all potential liabilities to the Gray family, which included the sums at credit of the deceased in draft accounts of the partnership to 4 January, viz. a provision of approximately £621,000 for payment of tax, and capital of about £296,000, effectively a capital entitlement of £917,000. There is no sign of such an instruction in the contemporaneous correspondence and records of meetings laboriously scrutinised in the proof. Evidence that the objective of the pursuers was to secure a "clean break" to get the "Grays" out of the system came from Francis McConnell and Kevin Rennie. Mr McConnell said that the whole thrust of the negotiation on 30 April was to achieve a clean break to get Nelson Gray off the pursuers' back. The sums they were paying were sums to the "Gray family" for their interest. However while Mr McConnell was clear that the capital balances at the credit of the accounts of Mrs Gray and Nelson Gray in the interim partnership were included in the purchase price he was not able to say why the price of a minimum of £1 million was selected. He also said that the executors' interest was mentioned by neither side. Mr Rennie's recollection was that the objective of both parties was to secure a clean break, but to him that meant Mrs Gray and Nelson Gray having no continuing involvement in the business and giving up their rights to continuing income for a cash consideration calculated on a factor of the profits of the firm. He did not mention any specific discussion of a clean break. I consider that makes sense. The expression "a clean break" against the background in which the pursuers felt that Mrs Gray should not be involved with them as a partner at all and wanted to sever their links from Nelson Gray and neuter his capacity for disruption of their business, seems to me to mean terminating the ongoing involvement of members of the Gray family in the business. It does not appear to me to be an expression which carries with it the implication of paying off the claim of executors of the deceased partner. That the expression should have that more limited meaning is consistent with the fact that the missives provided for a continuous relationship between the pursuers as tenants and members of the Gray family including the deceased's estate as their landlords.
The only witness to say that specific instructions were given to Mr MacLeod that the pursuers wanted an agreement which involved paying one sum in return for discharging all liabilities to the Grays and that the complete break they sought involved the discharge of all liabilities to the Gray family was David McLaughlin. As I have already narrated, after the offer arrived on 30 April there were discussions between the pursuers and Mr MacLeod about the terms of qualifications to be included in the acceptance, e.g. including the possibility of rent review down as well as up and requiring the Grays to write to existing clients explaining the situation. Mr MacLeod mistakenly included in the qualified acceptance a provision that the pursuers would pay for fixed assets of the business at net value. According to Mr McLaughlin the pursuers explained to him that they were not prepared to pay another figure and that the one payment was to be for a complete break. Whatever the mistaken inclusion of that qualification in the acceptance tells us about Mr MacLeod's though processes (and I shall deal with that later) it does not seem to me that the episode relating to the fixed assets has any obvious bearing on the intended status of the executors' claim. In view of the importance of this instruction it is strange that there is no reference to it in Mr McLaughlan's detailed account of events compiled in December 1993. Furthermore, if the stipulation was made on the telephone, one would expect at least one of the other pursuers present, viz. Clark and Thomas, to remember it. While Mr McLaughlin tended to refer to "we" as doing things in the course of negotiations and it is not entirely clear which pursuer was talking to Mr MacLeod when that stipulation was made, it was probably Mr Clark. It was my impression from the evidence of Mr McLaughlin, Clark and Thomas that most, if not all, the discussion by telephone with MacLeod was done by Clark. His recollection was not of reference to a "clean break", but that they pointed out to Mr MacLeod that they were buying "the whole thing" and that included the assets. He, like Mr McLaughlin, remembered that Mr MacLeod had described the payment as a "retirement fund for the Grays". Mr McLaughlin's recollection of that remark was, "a retirement sum for the Grays to go off into the sun." I do not find any of these expressions indicative of an aim to discharge the executors' claim. Mr Clark felt all along that a clean break in the sense of their setting up their own business and not entering into an agreement with the Grays nor continuing a relationship with them by e.g. leasing business premises was preferable. He was persuaded by his colleagues and, to some extent, by Mr MacLeod to accept that an agreement was better. He did not speak to such a stipulation being part of the instructions given to Mr MacLeod. Similarly George Thomas did not speak to any such stipulation and indeed explained his understanding of the agreement as being that the pursuers would pay a certain sum and Mrs Gray and Nelson Gray would depart into the sunset never to be seen again. Michael Donald was not involved in the negotiations on 30 April. Taking all that evidence together I do not find it a satisfactory basis for holding that specific instructions were given to Mr MacLeod to secure the discharge of all potential claims by any of the Gray family or their representatives.
However, consideration of events in the period shortly after 30 April answers clearly the question whether there were such instructions. It was common ground that the agreement did not achieve the discharge of the executors' claim, since the executors were not party to it. It was also common ground that Mr MacLeod did not give any indication to the pursuers that that objective had been achieved or that the agreement would not achieve it. When in the days following the missives a claim was made for payment of a sum due to the estate of Tom Gray, it is in my opinion inconceivable that any person who had given such instructions and must therefore have believed that the agreement secured that objective would not have instantly refuted the claim or instructed his solicitor to do so. When faced with a claim for £621,000 the pursuers conspicuously failed to do so. Straight away there was difficulty between the pursuers and Nelson over the operation of the firm and client bank accounts. This problem dragged on for many months and became bound up with the claims made by Mrs Gray and Nelson Gray for payment of the sums at credit of their own accounts in the interim partnership from 4 January to 30 April and the claim of the executors for payment of the two sums at credit of the deceased's account as at 4 January. By at latest 5 May Kevin Rennie had been enlisted by Nelson Gray as a go-between to discuss with the pursuers inter alia how they intended to pay the tax provision of £621,000 and the capital accounts of Mrs Gray and Nelson Gray at 30 April. On 5 May Nelson Gray wrote to David McLaughlin asking him to tell Rennie how payment was to be made of the £621,000 and the two capital accounts totalling £525,000. Mr McLaughlin claimed that he copied the letter to Mr MacLeod. There was no copy of that letter found on MacLeod's files. On the contrary, Mr MacLeod's contemporaneous note of a meeting with Clark, McLaughlin and Thomas on 6 May records discussion of irritations of varying gravity, the most important of which was in relation to a bank account which Nelson Gray had advised the bank not to operate. There is no record of an instruction to refute the claim. Mr MacLeod's recollection coincided with his note. Rennie wrote to McLaughlin on 12 May acknowledging a letter of 8 May from McLaughlin and noting that McLaughlin had not yet advised him of proposals regarding payment of the sums due to the estate and to Mrs Gray and Nelson. Although there is reference to Mr McLaughlin telling him on the telephone that he had passed the matter to the pursuers' accountants to consider I am satisfied that the matter was not passed to them. The crucial thing is that the pursuers, and in particular Mr McLaughlin, did not respond to these letters by asserting that no sums were due. On 13 May Mr MacLeod met the pursuers to discuss the latest developments in the continuing "aggravation" they were encountering in their take over of the business. The issue was not raised. Then on 22 May a formal letter was sent by Bird Semple acting for the executors demanding payment of funds due to Tom Gray's estate. On the same day Nelson Gray wrote to David McLaughlin stating that he understood the executors were writing formally requesting the repayment of £621,000. That sum was confirmed to Mr MacLeod by Bird Semple in a letter dated 2 June. Mr MacLeod's replies to these letters are in confusing terms, but there is no indication that they were a reflection of the reaction of the pursuers. The result of the correspondence and a number of telephone calls was that a meeting was held on 24 June. Adam Clark attended this meeting along with Mr MacLeod. The others attending gave evidence, viz. Rennie, his assistant Colin Henderson, and an employee of one of the Gray companies, Jim Ramage. Mr Rennie had an extensive fi
By 24 June the bank accounts had been frozen. That state of affairs continued and the dispute rumbled on without any sign of a break-through. Although the executors' initial concern was to secure immediate payment of the tax provision element of the deceased's capital, by early August his capital account was also the subject of discussion. Coincidentally the fortunes of Collection Agencies Limited, a not insignificant client of Gray Scott & Co., were in decline. There was a suggestion that Scott & Co, and in particular Mr McLaughlin, might become involved with them again to try to improve the situation. Messrs McLaughlin and Clark understood discussion of that to be the purpose of a meeting that Mr John G Gray, the deceased's brother and legal adviser to the Gray empire, proposed they should have with Professor John Small, referred to earlier, friend of the Gray family, adviser to the various business in the Gray empire and one of Tom Gray's executors. He was Professor of Accountancy and Finance at Heriot Watt University. That was not how he saw the meeting. He envisaged a meeting to discuss settlement of outstanding obligations. I suspect that John G Gray, mindful of how harmful to the Gray empire and the Scott & Co business a festering dispute might be, used his own resourcefulness to set up a meeting at which the parties could discuss the issues they wished to discuss. While David McLaughlin and Adam Clark do not remember the meeting as one about outstanding obligations, the resultant correspondence belies their impression. The meeting was on 28 September. On 8 October Professor Small wrote to Mr Clark as follows:
"In the interim you will recall that David tossed on the table the proposition that Scott & Co might be prepared to pay to the 'Grays' a lump sum this year as a once and for all settlement to cover all of the outstanding issues to try and bring matters to a close. I indicated that I would speak to Mrs Gray and the executors about this. There is no objection in principal. Agreement would obviously depend on the financial implications of what was being offered and would have to take into consideration the four areas where monies are due:-
1. T.C. Gray's Capital Account as per the accounts for the period to January 3.
2. The amount T.C. Gray set aside for taxation as per the above accounts (incidentally I believe that this sum should be part of his Capital Account).
3. The sums due to Mrs Gray and Nelson as per their share of the profit for the period January 4 and April 30 and any other sums outstanding on their Capital Accounts not otherwise dealt with under 1 and 2.
4. The three instalment payments which are due to be paid over the next three years."
In reply Mr Clark sent the following letter, having discussed its terms with Mr MacLeod and Mr McLaughlin:
"What you say in your letter leaves me somewhat confused. The first paragraph is quite clear. What leads to my confusion is your four points. Points (1) and (2) are indisputable and, during our conversation, it was pointed out that T.C. Gray's Capital Account and the amount set aside for his taxation (whether or not it was part of his capital account) was due to his Estate. We have no argument with that and, as I said, George Thomas and I are quite happy to pay our respective proportions on demand. Where the confusion arises is your points (3) and (4). Unless I am missing something, they are one and the same thing. The agreed payments reflect Mrs Gray and Mr N.C. Gray's 'whole beneficial interest' in the firm of Gray Scott & Co. This clearly includes any balances on their respective Capital Accounts at 30 April 1992 ... as previously stated, George and I are quite happy to pay our share in relation to your items (1) and (2). I assume Mrs Gray and Nelson Gray are also in a position to pay their shares. Points (3) and (4) do not arise until the first instalment date or, if and when, we arrive at some agreed lump sum payment".
The reference to proportions and payment by Clark and Thomas I shall return to in a different context later. What matters in the present discussion is that Mr Clark, with Mr McLaughlin's approval, was acknowledging a liability to pay at least a proportion of the two capital sums claimed by the executors. Both Mr Clark and Mr McLaughlin tried to explain this as something which would arise as a package deal in place of the three instalment payments. However it is plain that that was not what was being proposed. The point about a package deal arose only in relation to the question whether the instalment payments should be made or, alternatively, the sums standing at the capital accounts of Mrs Gray and Nelson Gray should be paid.
That is consistent with Mr Clark's earlier response in August when Mr MacLeod sent him a copy of a letter he had received from Bird Semple and his reply, the former threatening legal action for the sum due to the executors and the latter explaining that any sum due could not be calculated until accounts to the date of dissolution of each partnership had been prepared and even then only a proportion would be due. Mr Clark described the terms of the reply as "most satisfactory".
There was evidence from Mr McIver that a matter of days after 30 April he telephoned Mr MacLeod about the sums due to the executors and to Mrs Gray and Nelson and that Mr MacLeod seemed surprised by the suggestion that any sums were due. I found that evidence very vague. Mr McIver did not have access to his file note. Mr MacLeod had no recollection of the call. I am not able to place any weight on this evidence.
I am satisfied that the pursuers did not instruct Mr MacLeod on 30 April that they wished an agreement which discharged all potential claims by the Gray family, and the evidence indicates no other basis on which it might be said that Mr MacLeod ought to have realised that that was their objective.
BREACH OF DUTY
The position is somewhat different however in relation to the question whether in the circumstances Mr MacLeod had a duty to draw to the attention of the pursuers the limited scope of the agreement and that their significant financial obligations to the executors were not dealt with in the agreement. The context for consideration of this issue is that the subject matter of the offer of 30 April was "our clients' whole beneficial interest in and to the business of Messengers-at-Arms and Sheriff Officers" and that the business was to be acquired "with effect from 1 May 1992 and that in good faith and as a going concern". These are the core elements of the offer. Any person wishing to accept such an offer would plainly wish to acquire the things that are used on a day to day basis to run the business, such as office equipment of varying kinds, motor cars and bank accounts. Such a person would obviously wish to have a secure title to these. He would therefore expect to be advised if his proposed agreement was not likely to transfer the things or assets used to run the business on a day to day basis and if these assets were somehow encumbered. He would also expect to be told that an obligation he thought was discharged by entering the agreement remained outstanding. In a situation where there had been two firms, but between them a seamless transfer of the business, it was plainly necessary that a solicitor advising in the negotiations should ensure that his clients understood what the "whole beneficial interest in and to the business ..." offered to them comprised. That was particularly so where, of the two sellers, Mrs Gray was a partner only in the interim partnership whereas Nelson Gray was a partner in both. Any solicitor acting in the negotiations was bound to analyse the legal position at that stage to satisfy himself that he fully understood what was on offer and thereafter to ensure that his clients also understood that. As I have already decided, general advice about the operation of the Partnership Act 1890 given on 16 January before the catalogue of varying possibilities set out in this Opinion arose would not satisfy that duty. I am satisfied that Mr MacLeod, whether through tiredness or being rushed at the end of a busy day, did not on 30 April analyse the legal impact of the offer and advise the pursuers thereon as he ought to have. On his own admission he did not advise the pursuers of the effect of the agreement. It may even be that he genuinely believed that he was a simple amanuensis responsible only for writing or typing out the terms that his clients had fixed upon. However, that belief would not explain his persistent and repeated failure in the weeks, months and years thereafter to analyse the situation properly.
Section 1 of the Act defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". That immediately raises the issues of what is meant by "business" in the offer. David Williamson confirmed that it is important for a solicitor in the position of Mr MacLeod in this case to distinguish between the business of the firm as part of the definition of partnership in Section 1 and "the business" which those involved as partners might view as the commercial entity that they were managing. In the not uncommon event of the death of a partner the firm is, subject to any subsisting agreement to the contrary, dissolved automatically. However, in real life the commercial entity will generally continue to operate as before. In this case it was operated by a new partnership. Section 4 provides that each firm has its own distinct legal personality.
The reality that a business might simply be carried on by the surviving partners or some of them without any settlement of accounts as between the firm and the estate of the deceased partner is recognised in the Act. In that regard Section 42(1) provides as follows:
"Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to his share of the partnership assets, or to interest at the rate of 5 per cent per annum on the amount of his share of the partnership assets".
That sub-section underlines the continuing interest of a deceased partner's estate in the use of the partnership assets until final settlement of accounts between the firm and his estate.
Such a final accounting is in terms of Section 43 which provides as follows:
"Subject to any agreement between the partners, the amount due from surviving or continuing partners to an outgoing partner or the representatives of a deceased partner in respect of the outgoing or deceased partner's share is a debt accruing at the date of the dissolution or death."
That Section pins responsibility for paying the deceased's share to his executors upon the partners who continue a business.
The provisions governing the situation where existing partners continue the business reflect the basic rule which applies on dissolution by death, set out in section 39, that each surviving partner is entitled to have the firm wound up and, after all liabilities have been settled, to payment of his share of the assets of the firm. Section 44 then sets out the order in which the assets of the firm must be applied and the last two entitled categories in the orderly queue specified are:
"44 ...
(b) ...
3. In paying to each partner rateably what is due from the firm to him in respect of capital:
4. The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible."
It was common ground at the proof that the offer of 30 April related to the interests of Mrs Gray and Nelson Gray in the interim partnership. It was also common ground that that partnership did not acquire title to the assets of the original partnership. Section 20(1) of the Act provides as follows:
"All property and rights and interest in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in his Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership, and in accordance with the partnership agreement."
The effect of the foregoing provisions is that the executors, who were not party to anything agreed in the period between 4 January and 30 April, were entitled to pursue the assets of the original partnership to have them realised in settlement of their claim for the sums at credit of the deceased partner's account. Such action would be unnecessary if the partners who had the benefit of the assets paid the said sums to the executors. These partners were the pursuers and Nelson Gray. If the effect of Nelson Gray transferring his beneficial interest to the pursuers was to relieve him of that responsibility (which was not explored before me and which must be doubtful), then the responsibility would fall on the pursuers. It was also common ground that, although by 30 April accounts to 4 January were available in draft form, none of the partners had any idea on 30 April what sums had been drawn by the Grays between 4 January and 30 April, how the bank accounts stood or what assets might be regarded as those of the original partnership and which those of the interim partnership. The pursuers acknowledged that in terms of assets they could have been acquiring title to very little indeed. There was plainly in my opinion in these circumstances a duty upon Mr MacLeod to draw to the attention of the pursuers that the substantial claim of the executors for the sums at the credit of the deceased's account had not been dealt with by the agreement, to draw to their attention that the assets being used by the firm might still, to a large extent, be the property of the original partnership and that they might not secure title to them and to advise them that the claim of the executors would have to be met either from the assets which belonged to the first partnership or by payment by the partners of the original partnership or a combination of both. I do not for a moment pretend that Mr MacLeod could do more than alert the pursuers to these points in very general terms in view of the uncertainty of everyone about what the assets were. However, he was bound to alert them to the outstanding claim and to the potential weakness of the proposed purchase in terms of acquiring assets, and that would inevitably have alerted them to their responsibility to meet the executors' claim, if not in whole at least in substantial measure.
That the question what the pursuers' potential liabilities were and the question what assets were acquired as the result of the missives were complex questions on which there was much scope for misunderstanding on the part of the pursuers is amply demonstrated by the confusion reigning in the mind of Mr MacLeod. In response to a letter of 2 June from Bird Semple suggesting payment to account of the £621,000 by release of sums in the business account to the executors, Mr MacLeod on 3 June 1992 wrote this:
"It is by no means certain that the funds in the Business Account of Messrs Gray Scott & Co held by the Royal Bank of Scotland plc will all be due to the estate of the late Mr Thomas C. Gray. This will depend upon the Final Accounts of the Firm of Messrs Gray Scott & Co as at the date of death of Mr Gray and at the termination of the Partnership at Will. It must be borne in mind that the funds in the Royal Bank of Scotland as at 30 April 1992 represented funds of the Partnership at Will and not funds of the previous Partnership in which the late Mr Thomas C. Gray was a Partner."
Then on 6 August 1992 in reply to a letter from Bird Semple dated 4 August seeking payment of that sum and the separate balance in the deceased's capital account Mr MacLeod wrote this:
"The Accounts of the Firm of Messrs Gray Scott & Co to the date of death of the late Mr T. C. Gray have not been finalised and unless and until that is done the liability, if any, of the former Firm of Gray Scott & Co to the Estate cannot be determined. There are certainly no funds held by our clients or under our client's control which at this time fall to be paid to the Executors.
There is no doubt that the way forward is for Messrs Coopers & Lybrand who were the Accountants to the Firm of Messrs Gray Scott & Co to make some progress with the finalisation of the Firm Accounts not only to the date of Mr Gray's death but also to the date of the dissolution of the Partnership in 30 April 1992. Once these Accounts are available and agreed then no doubt the sums, if any, due to the Estate of the late Mr T. C. Gray can be determined and procedures for payment made. It has to be borne in mind that the very large proportion of any sums which are due to the Estate of the late Mr Gray will be payable by Mrs Gray and by Mr Nelson Gray as those having the major equity share in the firm of Messrs Gray Scott & Co."
Then on 12 August again in reply to Bird Semple Mr MacLeod wrote:
"My clients are not continuing the business of Gray Scott & Co. They acquired certain interests of your clients. They did not acquire the business. My clients have therefore no liability for the liabilities of the Firm of Gray Scott & Co as it stood at 30 April 1992. These are the liabilities of the Firm. Once they have been settled by the Firm, no doubt whatever balances remain can be divided appropriately amongst the Partners. My clients have acquired certain interests from your clients for a fixed consideration. Beyond that the agreement does not go."
Mr MacLeod thought that the liability to the executors lay with the interim partnership and its partners. What assets Mr MacLeod envisaged being used to pay the liability was not clear. By 21 August his position had been refined somewhat and he wrote of the pursuers taking over the assets and liabilities of Gray Scott & Co as at 30 April "as they then remained". Mr MacLeod's confusion was initially even greater. Within a month of the missives he wrote on 27 May to Bird Semple as follows:
"I do agree that one of the matters which has to be discussed at any meeting is the way in which the Accounts of Messrs Gray Scott & Co should be brought to a close and the arrangements thereafter to be made for the payment to the Partners of that Firm and the Estate of the late Mr Gray of such sums as may be due to them. These payments, of course, require to be made from the resources of the Firm of Messrs Gray Scott & Co because it is from that Firm that the entitlement arises. If the resources of Gray Scott & Co are not sufficient then there will clearly be a shortfall in the payments made. The estate of the late Mr Gray and Mrs Gray and Mr Nelson Gray have no right to any funds from any source other than the assets of the former Partnership and obviously the in-gathering of these assets and the striking of Final Accounts for the Firm is something which is of primary importance."
That such an able and experienced solicitor should be in such a state of confusion over the terms of the missives illustrates the necessity for careful analysis of the legal effect of the offer and an explanation to clients of what acceptance of the offer would achieve and what further financial consequences it would have.
There is no doubt that Mr MacLeod did not analyse the legal effect of the missives carefully and did not give the pursuers the advice he was bound to. There was plainly scope for the pursuers to think that the missives would secure for them the assets of "the business" for them to use freely from 1 May. That could only be so if they had acquired them under the missives in a way that prevented either the executors or indeed Nelson Gray as a partner of the original firm from pursuing them insofar as they were assets of the original firm for settlement of sums at credit of the deceased and Nelson Gray at 4 January. That could only be so if the claims to these sums were discharged by the missives. It was plainly foreseeable that the pursuers might think that these substantial claims had thus been discharged on 30 April. Mr MacLeod had no reason to believe that the pursuers did not think that that was the situation.
Throughout the second half of 1992 Mr MacLeod maintained the position that the executors' claim was a liability of the second firm and, if not met from firm assets, divisible among the partners of the second firm including Mrs Gray, with the pursuers' liability being confined to 25%, that being the profit share of Adam Clark and George Thomas. Then in March 1993 litigation commenced with an action at the instance of the executors to recover the capital and tax reserve of the deceased. That was followed by an action by Mrs Gray and Nelson Gray for sums at credit of their capital accounts in the interim partnership as at 30 April. There was a third action for payment of the first instalment under the missives and interest thereon, which, after payment of that instalment, boiled down to an action for interest. These actions were ultimately settled by payment of £1 million in November 1996 in the first action. The pursuers were always confident of their defence to the second action and that confidence was shared by Mr MacLeod and counsel. The third action was of no consequence. From the point at which he instructed counsel to draft defences to the executors' action until his firm withdrew from acting in 1996 Mr MacLeod insisted that the principal line of defence should be that Mrs Gray assumed her late husband's capital position when she stepped into his shoes by becoming a partner in the interim partnership and that she should pay any sums due to the executors. Both senior counsel who were substantially involved in the defence to that action over a considerable period of time were sceptical about the existence of an evidential basis to prove the defence and indeed about the relevance of the defence. On a number of occasions, either in instructing counsel in writing or orally at consultation, Mr MacLeod adamantly asserted that defence and that that was the effect of the agreement he had made with Mr McIver. I do not propose to embark upon a detailed analysis of all the evidence on this aspect of the case. It is plainly inconsistent with the position taken by both Mr MacLeod and the pursuers in the period immediately following the missives. It is a line of defence which was consistent with the capital position of Mrs Gray shown on draft accounts prepared on behalf of the Gray family in the course of 1992. The negotiations with the Gray accountants on the draft accounts were largely conducted by Mr McLaughlin on behalf of the pursuers. By the beginning of 1993 when the executors' action was raised he was the partner principally involved in instructing Mr MacLeod. In his evidence Mr MacLeod suggested that Mr McLaughlin and his reporting to him on these negotiations must have been the source of this line of defence. He denied that he personally was the source. He maintained that whenever he referred to that being the effect of the agreement he reached with Mr McIver and to the implication if necessary of a notional withdrawal by Mrs Gray of capital from the original partnership and the re-introduction thereof into the interim partnership he was simply reflecting what the material being produced by the Gray camp showed. Bearing in mind that Mr MacLeod must have realised that he would be the principal witness on this issue at proof and yet maintained in evidence that he was not the original source of this defence, I found it disturbing that he at no stage expressed any reservation, far less disquiet, about the line of defence. Indeed I find it troubling that a solicitor of Mr MacLeod's experience should maintain that line of defence so vehemently and not take the precaution of alerting counsel who grilled him about it to the limitations of his evidence nor point out plainly either orally or in writing to his clients that that line of defence was not consistent with the facts as he knew t
The duty pled by the pursuers which I consider Mr MacLeod failed to implement is set out at pages 29E and 32C in the following terms:
"In any event it was his duty to advise the pursuers that the rights of the Executors of the late Thomas Gray were of substantial value and had not been discharged. It was his duty to advise the pursuers of the consequences of such a failure."
CAUSATION OF LOSS
Did the pursuers sustain any loss as a result of that breach of duty? The pursuers' case is set out at page 35D. Had they been properly advised they would not have entered into the missives. They departed from their case set out at page 33B that had they been properly advised in January, they would have refused to accept Doreen Gray as a partner. In relation to the case on which they insist, the proper advice to which they refer is that specified in the duty I have just quoted, viz. that the executors' claim was of substantial value and had not been discharged and what the consequences of that were for them. They maintain that had they been properly advised they would have allowed both partnerships to be dissolved and would have established their own partnership which they claim would have been just as profitable as the reconstituted business from 1 May onwards was. In other words they say that, had they known the true situation, they would have walked away and established their own new business.
What steps the pursuers would have taken have to be considered against the background of the state of affairs as at 30 April in their efforts to establish their new business. They gave uncontroverted evidence that they had secured 70% or so of the client base of Gray Scott & Co. The experienced staff they required were likely to join. They had secured the premises they needed in Aberdeen and Edinburgh, the computer and other office equipment required to run the business and suitable cars for the messengers. Banking arrangements including a substantial overdraft were in place.
It was the evidence of Mr McLaughlin that, if he had been told in April that he might also face a claim by the executors for a significant portion of the sums at the credit of the deceased's account, he would have commenced his own business on 1 May because he considered that he and his colleagues were in a strong position and that would have been a wholly unacceptable price to pay. Adam Clark was reluctant to proceed with the deal in the first place, but went along with his colleagues because he thought it was a good thing to try to salvage as much of the business as possible and because he did not feel that he and his colleagues were in a strong position financially. If they had been asked to find close to £1 million "up front" (the executor's claim was instantly prestable) he would not have considered it. He could not conceive of the bank manager who would have backed them to that extent. George Thomas doubted whether they could have paid £1 million up front, and did not think that they would have entered into an agreement that involved paying a further £1 million, but would have set up their own business the next day. I found this evidence unconvincing. It was given almost parrot fashion. There was no indication that any of the three partners had given serious thought to what they would have done if faced with that information on 30 April. At that time they were anxious to employ as many of the staff as they could. They did not think that going off and setting up their own business would provide any greater protection from interference by Nelson Gray. They believed that he would try to sabotage their efforts to establish a new business. In February and March, and possibly early April, they had been prepared to enter into partnership with Mrs Gray and Nelson in the long term on the basis that the Grays' joint interest would be about 60%. The stumbling block was the degree of control that the Grays insisted upon having. It was in the context of the Grays refusing to negotiate on that and endeavouring to impose "partnership" terms upon the pursuers that the pursuers had taken steps to set up their own business and had served notice of dissolution. When circumstances changed at the end of April and the Grays were prepared to negotiate the pursuers readily responded with only Mr Clark having some reservations. On proper analysis of the situation it would have been obvious to the pursuers that the price of 20% per annum for three years was not so much a capital payment as a ceding of 20% of the profit of the firm for the next three years. The executors' claim fell into a different category since it was about £1 million and immediately prestable. However, over three years, even allowing for interest, had they borrowed it, that could have been amounted to no more than another 25% of profit. For a total commitment of 45% of profit for three years they would have secured for themselves 55%, and after three years 100%, of the profit of the business they knew to be so successful and whose success had not been diminished in any way by the events of the last four months. That should be contrasted with the 60% the pursuers were prepared to concede to the Grays on a long term on-going basis. For much less they would secure complete independence from the Grays. I accordingly do not consider that they have proved that, if properly advised by Mr MacLeod, they would probably have walked away and established their own business.
There was some evidence that Mr MacLeod advised the pursuers that, if agreement was not reached, there was a distinct possibility that a judicial factor would be appointed to wind up the affairs of the two partnerships and that that was likely to prove expensive. I am unable to conclude that that either did influence or would have influenced the actions of the pursuers.
There is an additional reason for considering that the pursuers have sustained no loss. The evidence of the pursuers Clark and Thomas about what they would have done had they been properly advised proceeded upon the basis that they would have been told of an obligation to pay a further £1m. The evidence of Mr McLaughlin was given in answer to a rather different question, what he would have done had he known he might also face a claim by the executors for all or a proportion of the capital sum and tax provision at the credit of the deceased. That was the correct question to pose. It was in my opinion unrealistic to ask the pursuers what they could have done on 30 April 1992 if they had known of an obligation to pay a further £1 million. Whatever the rationale for arriving at the figure of £1 million, it was certainly not a proper analysis of the situation as at 30 April. While the exact figures attributed to the capital and tax reserve of Tom Gray did vary from time to time according to the exact approach being taken to calculation in the preparation of any given set of accounts, the two figures generally accepted as due in the course of the proof were £621,000 and £296,000, a total of £917,000. I accept Mr Hodge's analysis of the legal position that, following dissolution of the original partnership, the executors' claim was to payment from the assets of that partnership or, if they were insufficient, from the five surviving partners, namely the pursuers and Nelson Gray. The five partners inter se would have been liable on the basis of their equity stakes, i.e. their profit share. Messrs McLaughlin and Donald were salaried. As at 30 April the pursuers believed that Nelson Gray's profit share was 15%, the same as that of Adam Clark, and that George Thomas's share was 7.5%. Applying these percentages to 100% would result in an obligation on the part of these three profit sharing partners to meet any shortfall in the percentages Nelson Gray 40%, Adam Clark 40% and George Thomas 20%.
The action at the instance of the executors was framed on a rather different and, in my opinion, erroneous basis. Their claim was against the pursuers as the by then owners of 100% of the interests of the interim partnership. The advice which should have been given to the pursuers in the context of concluding the missives was that the liability to the executors existed but would be payable initially out of the assets of the original partnership and that any shortfall would be payable by Nelson Gray, Clark and Thomas. The pursuers claimed throughout the proof that they were unaware of the state of the assets as at 30 April because they anticipated that the Grays would have withdrawn funds and that the bank balances would have been much lower than they were. They gave no thought to the value of the assets the agreement would secure for them. It was never the approach of the pursuers to try to calculate what value for money in terms of assets they were getting for the price in the missives. It is of course possible, indeed likely, that Nelson Gray would not have quietly accepted a liability to pay 40% of the executors' claim. He is likely to have done what he could to ensure that he was kept free of liability by identifying the traceable and available assets of the original partnership and endeavouring to show that they were sufficient to settle the claim. However that possible development was never explored. The fact of the matter is that proper advice on 30 April could have been no more precise than that the pursuers had a potential liability to meet part of the executors' claim. It was no part of the pursuer's case to explore the effect of the indemnity clause in the missives. They did not examine in a way which would allow me to make findings thereon the movement or attempted movement of large sums of money in and out of the bank accounts of the partnerships in December/January and between January and April. And as I have explained above it was not part of their case that Mr MacLeod could have estimated their overall financial commitment and advised them about that in the course of negotiations on 30 April. On the evidence it is not possible to state the position more precisely than that he should have advised them that the equity sharing partners had a potential liability to meet part of the executors' claim. In other words, in terms of the duty referred to above, he was bound to advise them that the executors' claim was of substantial value and had not been discharged and that they had a potential liability in respect thereof.
For reasons which I have already set out fully in dealing with the question whether the pursuers gave specific instructions that they wanted a deal which discharged all liabilities to the Gray family, I am satisfied that the pursuers were aware of these facts on 30 April. They acted in the knowledge thereof. They also, as a matter of fact, secured all the assets of "the business", of which a substantial proportion were truly the property of the original firm. How much was not explored in detail. It follows that from Mr MacLeod's breach of duty the pursuers have sustained no loss.
COMPUTATION OF LOSS - BACKGROUND
The pursuers seek damages based on the difference between the financial consequences of implementing the missives and what they assert would have been the financial consequences of dissolving Gray Scott & Co on 30 April and establishing their own business independently. They invite me to divide the total equally between the first three pursuers who are equity partners of Scott & Co sharing profits equally and who each paid one third of the missives price. No award was sought for the fourth named pursuer.
COMPETENCY OF CLAIM
The defenders insisted upon their plea to competency and in support thereof submitted that the claim by each individual pursuer could only be made in respect of losses which that individual had sustained rather than for a proportion of firm losses as set out in the alternative conclusion now insisted upon by the pursuers. That submission was made under reference to Harkess v Mowat (1862) 24 D. 71 at 703 and Buchan and others v Thomson 1976 S.L.T. 42 at 44. These were authority for the proposition that each individual pursuer's claim must be separately concluded for and the conclusion should be for his own personal loss. I have decided to repel the defenders' plea to the competency. The alternative conclusion, in terms of which I was invited by the pursuers to pronounce decree, is for three separate sums payable individually to the first three pursuers. The status of each in the firm of Scott & Co was identical. Each had a different status in Gray Scott & Co with Mr Clark having twice as big an equity share as Mr Thomas and Mr McLaughlin being a salaried partner. In spite of the absence of the accounts of Scott & Co relating to the period when the litigation was settled, I accept the evidence of Mr McLaughlin that the first three pursuers met the commitments under the missives and the figures for settlement of the litigation and the costs thereof equally. While the ultimate responsibility for the executors' claim lay with profit sharing partners, it was undoubtedly the responsibility of all partners of the original firm in the first instance as stewards of its assets to preserve them for settlement of the executors' claim. Although Mr McLaughlin could have sought relief for his contribution to settlement of the executors' claim from the profit sharing partners it was also appropriate and entirely reasonable for him to participate with them in the settlement. He was after all, on the face of it, an equal party to the missives. Had I held that Mr McLeod's negligence caused loss to the pursuers I would also have held that that loss included the commitment made by Mr McLaughlin in settling the litigation. Even if Mr McLaughlin could not competently claim in respect of the settlement, the total loss would be the same but divisible differently among the first three pursuers.
COMPONENTS OF THE COMPUTATION
In calculating the claim it is necessary to take into account the sums at credit or debit of the capital accounts of all four pursuers as at 30 April 1992 on the basis of revised accounts prepared on the assumption that the business would be wound up, and to take account also of the capital which was credited or debited to each in the new firm following the missives. In calculating damages the pursuers seek to incorporate the figures relating to all four pursuers as one net total, to combine that with the figures for each element involved in computing the claim and to divide the final figure among the first three pursuers The accounts of McLaughlin and Donald both showed debit balances. Since the final total is bound to be the same whether the calculation was done that way or by attributing the actual capital account figures to the respective partners, and since I was not advised of any practical consequences for the pursuers or defenders in calculating damages that way, I consider that to be an appropriate way for damages to be computed. It is consistent with the position taken by all four pursuers from 4 January that they would act as one in their dealings with the Grays.
There are a number of ingredients in the pursuers' claim. The starting point is the price paid under the missives, comprising three instalments, £542,478 paid on 22 April 1994, £300,000 paid on 30 June 1995 and £200,000 paid on 18 August 1995, a total of £1,042,478. The whole assets of the business, without distinguishing between the original and interim partnerships, were in fact required by the partners. Assets valued at £360,869 were required on 30 April 1992 and the remainder, being the bank accounts which were frozen valued at £731,876, on 6 November 1996 when the three actions were settled. The other ingredients require comment.
LITIGATION SETTLEMENT COSTS
In November 1996 the pursuers paid £1 million to settle the executors' claim. That payment was made on counsel's advice. For that reason, it was submitted, it was reasonable for the pursuers to make it. The defenders did not challenge the figure. They challenged the distribution of responsibility among the first three pursuers. The settlement was nominally made by all four pursuers. Ultimate responsibility, however, lay with the profit sharers, viz. Adam Clark, George Thomas and Nelson Gray, and so in the absence of the assets of the first partnership being traced (and that did not happen) the salaried partners were entitled to relief against the profit sharers, Adam Clark and George Thomas, who in turn were entitled to partial relief against Nelson Gray. Along with these permutations the defenders threw into the pot the inability of Mr Brailsford Q.C., who was advising the pursuers at the time of settlement, to explain why the salaried partners McLaughlin and Donald were involved in the settlement at all. The defenders seemed to be suggesting that, even if the pursuers' individual claims were competent, in this state of confusion it was not possible for me to make any firm finding about the place of the figure for settlement of the executors' action in the computation of damages.
I have already explained why I consider that it was appropriate for the surviving partners of the original firm or any of them to settle the executors' claim. Obviously any partner who claims damages as a result must restrict his claim to what he has lost. An equity partner against whom relief might have been sought could not claim as if relief had been sought where the partner who might have sought relief refrained from doing so. On the face of it that would justify the first three pursuers making a claim for loss involving the settlement of the executors' claim although that claim could have been made against at least one other former partner.
However, I do have reservations about whether the full settlement figure can be claimed by the first three pursuers for a different reason. The full settlement figure can be included in the computation of damages only if it was reasonable to pay that sum. I do not accept that the fact that counsel advises settlement at a particular figure automatically establishes that it was reasonable to pay that figure. Where it is obvious how the figure is arrived at, then counsel's advice to settle at that figure would be an adequate basis for saying that settlement at that figure was reasonable. However, where it is not possible to divine readily the provenance of the figure, the Court will normally expect to have that explained to enable it to assess whether the settlement was reasonable. The obvious place to find such an explanation is in the evidence of counsel, should that be led. In the present case it was. Mr Brailsford Q.C. did not explain how that figure came to be selected. What he did explain was the reason for settlement and in doing so painted a picture of panic in the ranks of the pursuers and their advisers following appearances at procedural hearings on the Commercial Roll before Lord Penrose. Lord Penrose had raised the spectres of goodwill and unjust enrichment as factors not then featuring in the executors' claim but which it might be appropriate to consider. Goodwill was the factor that concerned the pursuers most. While their accountants thought goodwill did not arise, they were unable to put a figure on the potential value of goodwill because it could be calculated in a number of ways. Those acting for the executors conceded frankly that they had not thought of including a claim for goodwill until the matter was raised by Lord Penrose. As it was, they did not introduce such a claim and the pursuers never faced such a claim. Mr Brailsford gave no other indication of how the figure of £1 million was settled upon.
I must therefore consider whether any other evidence in the case establishes that. The total of the executors' claim was not far off £1 million. That action was allied with two others at the instance of Mrs Gray and Nelson Gray. Although the details of Mrs Gray's position were never clearly explained, it did appear in the course of the proof that she was the major beneficiary of her husband's estate. Nelson Gray was her closest ally. Against that background it would be unrealistic to think that, if the pursuers had clearly understood that they could obtain relief from Nelson Gray in respect of a proportion of the executors' claim equal to his percentage profit entitlement in the original partnership, they would not have endeavoured to obtain that relief. While the pursuers understood that Nelson Gray's profit share was the same as that of Adam Clark, viz. 15%, in fact in the accounts finally agreed in respect of the dissolution of the original firm as at 4 January 1992 his share claimed and acceded to by the others was 25%. His share exceeded the combined shares of Clark and Thomas and amounted to 52.63% of 100% liability shared among the three according to their respective profit shares. While I accept that, if Nelson Gray had been the subject of such a claim, he would have endeavoured to minimise his responsibility by insisting that the assets of the original partnership were identified in the first instance so far as possible and payment of the debt made therefrom thus limiting the extent to which the equity partners would be liable to account, such evidence as there was about the survival or otherwise of assets of the first partnership as at 30 April has not enabled me to hold that taking that course would have reduced his liability greatly. He would have borne responsibility with the other surviving partners for the disappearance of the original partnership assets. I was not addressed on what the effect of the indemnity clause in the missives would have been on that responsibility. Mr Brailsford gave no indication of what view, if any, was taken about interest on the executors' claim in arriving at the figure of £1 million. I am unable to form any view on that other than to note that £1 million is over £80,000 more than the basic claim and that accordingly some allowance may have been made for interest. What is clear is that the pursuers had an arguable case for restricting their liability to under one half of the executors' claim.
The litigation costs were non-controversial and I have no reason to think that they would have been significantly different however the actions were resolved. The total was £163,801.
GOODWILL
Goodwill could affect quantum in two ways. Any value attaching thereto could have formed part of the executors' claim; if the pursuers acquired goodwill by the missives then any allowance for the value thereof would reduce their claim. I have no hesitation in rejecting the suggestion that it would have been reasonable to make allowance for the possibility of a successful claim for goodwill by the executors in arriving at any settlement figure. I also have no hesitation in rejecting the suggestion that a figure for goodwill should have featured in the pursuers' calculation of their loss.
Two ways in which goodwill can arise in a situation like that presented in this case were discussed. Goodwill could attach to the business because it is expected to continue to produce a profit in the hands of whoever owns it. In these circumstances a purchaser is likely to include a figure in the price to reflect the fact that he has secured future maintainable earnings. What the purchaser secures is a business operation which will continue to earn profit. On the other hand, where the business depends for its profitability, as this one did, on the personal attributes and client connection of individual partners then, insofar as there is goodwill at all, it attaches to the individuals rather than the business. In such circumstances the profits of the business are unlikely to be maintainable in the future without the continued presence of those persons in the business. So a premium might be payable for goodwill where those persons were to continue to be part of the business. However, without them a third party purchaser would be unlikely to pay anything in respect of goodwill. Neither situation arose as at 4 January. The evidence was that the client connection of the principal clients of the business was with one or other of the pursuers. There was no evidence that a significant proportion of the business depended upon the relationship between any client and the deceased. There was never any question of the business as a whole being sold. It was not arguable that any goodwill attached to the interest of the deceased in the business as at 4 January. The same applies as at 30 April. There was no question of the business as a whole being sold. Neither Nelson Gray nor Doreen had a client connection producing profit at 30 April. It is, therefore, not arguable that any goodwill in that sense was secured by acquiring their beneficial interest in the business. The latter could have arisen if Nelson Gray, and to a lesser extent Mrs Gray, had a client connection producing profit at 30 April 1992. It might then have been said that one of the benefits the pursuers secured by the deal was the goodwill attaching to them or their beneficial interest in the business. Neither had any client connection and it is not arguable that any goodwill in that sense was secured.
The other way in which goodwill might arise is this. By concluding a deal with the Grays the pursuers could be seen to have removed or reduced the possibility of damaging competition either from the Grays directly or because they associated themselves with other Messengers-at-Arms and Sheriff Officers and tried to secure some of the client connection for themselves. Mrs Gray was not a Messenger-at-Arms and Sheriff Officer and had no direct involvement with clients. Nelson had been sidelined from dealing with clients for years because he was regarded by Adam Clark and the other partners as a liability rather than an asset in the firm's dealings with clients. How out of touch he was was illustrated by Francis McConnell's account of going with him in the period shortly before 30 April to meet the depute director of finance of Lothian Region and arriving at an office which the depute director had vacated five years beforehand. I am satisfied Nelson Gray would have presented no competition for the pursuers had they established their own business. There was no evidence that he would have been able to ally himself with any other firm of Messengers-at-Arms and Sheriff Officers to do so. He was capable of interfering in banking and accounting matters in a disruptive way and in fact did so in spite of the agreement of 30 April. He was also capable of spreading misleading information that could have an adverse influence on clients. But he was not a competitive threat. By 30 April the pursuers had secured about 70% of the client base and that was the most profitable part of the client base. There was no need for them to pay for peace, and, because of his disruptive tactics in interfering with the smooth running of their business in other ways, such as preventing them gaining access to the Gray Scott & Co bank accounts, they in fact achieved no greater peace than they would have realised by walking away and establishing their own independent business.
THE PROPOSED BREAKAWAY FIRM
The most controversial part of the pursuers' claim was the assertion that, if they had formed a breakaway firm and simply allowed the interim partnership to be wound up, the new firm would have been just as profitable as the business they ran following the purchase. In my opinion that would probably have been so. The feature of this whole case that I found most impressive was the ability of the pursuers to get things done. In a little over a fortnight before 30 April 1992 they secured premises in Aberdeen and Edinburgh, acquired equipment including computer equipment to operate their business, acquired motor vehicles on competitive business terms, secured the principal clients comprising about 70% of the business with the likelihood that they would secure more and secured sufficient staff to run the operation. The first three pursuers were plainly working round the clock to get things to a pitch where business could commence on 1 May, and I am satisfied that that objective would had been achieved. I am satisfied on the strength of their evidence that they had secured business which would have enabled them to run a sleeker, more efficient operation. I did not find it necessary to hear directly from their clients how likely they considered it was that they would remain loyal to the new firm. I was convinced by the ability and enthusiasm the pursuers displayed in running Gray Scott & Co and virtually establishing the breakaway firm that the clients secured would remain with them for the foreseeable future and indeed that others would be keen to follow suit. There was a dispute over computer software, but I am satisfied that Mr McLaughlin would have been able to duplicate the Gray Scott & Co software that he himself had written if necessary. I accept Mr McLaughlin's evidence that work done for the principal clients secured would have been handled comfortably in the two main offices obtained in Edinburgh and Aberdeen. I also accept his evidence that they could easily have opened additional branches to deal with particular types of work as necessary. The evidence demonstrated that the pursuers were experienced and innovative businessmen determined and likely to succeed in the new venture they had planned. They were the core of Gray Scott & Co. Adam Clark was the senior partner in overall control with the principal local authority contacts. George Thomas and he had contacts with Customs & Excise and Inland Revenue and Thomas also had a more localised client contact. He and Michael Donald had years of experience of running their respective offices and areas. David McLaughlin was described by John G. Gray as a "computer whiz kid" and was largely responsible for introduction of the computerised systems which made Gray Scott & Co so profitable. The staff which they would have employed were all experienced. It is true that the profitable years of the community charge were ending, but it was replaced by the council tax and the pursuers intended to be as efficient in the collection of that as they had been in dealing with local authority business so far. They anticipated a reduction in income following the ending of the community charge, but that reduction in income would be similar to the reduction they would have expected at Gray Scott & Co.
PROFITABILITY OF BREAKAWAY FIRM
The principal controversy surrounded the mechanics of the calculation of the profitability of the hypothetical firm. That was done using figures from the accounts for Scott & Co for the year 1 May 1992 to 30 April 1993. While one can readily understand the defenders' criticism of Mr McLaughlin's description of the figures as "projected results", and their further criticism that to compare the selective figures used for the hypothetical firm with the complete figures for Scott & Co was to some extent a circular argument providing a self fulfilling prophecy, I am satisfied that the exercise that was done was reasonable and in keeping with the operation which the pursuers not only envisaged but had virtually established for their breakaway firm. Their aim was to extract from their total trading figures the income they actually received from the clients whose business they had secured and set against that figures reflecting the overheads they would have incurred. The figures selected by the pursuers from the trading results of Scott & Co for that year produced a profit figure marginally in excess of the actual profit for the overall Scott & Co business. The figure was arrived at by taking the total trading results of the Aberdeen, Leith, Stirling, Galashiels and Inverness offices, subtracting various overheads that would not have been incurred by conducting business the way they proposed in two offices, adding in the income from other branch offices for the business of John G. Gray & Co, Solicitors, the Inland Revenue, Customs & Excise and Fife Regional Council, making an adjustment for one salary and then making substantial further allowance for administrative charges. I consider that that was a reasonable approach. I also consider that it was reasonable to confine the exercise to the first year of operation of Scott & Co, since thereafter the dynamics of a constantly evolving business, as this one was, could distort the comparison.
HYPOTHETICAL ACCOUNTS ON DISSOLUTION AT 30 APRIL
The final element in the calculation on which I need to comment is the formulation of the dissolution accounts as if there had been a winding up of the business as at 30 April 1992. These showed that the sums at credit or debit of the pursuers' capital accounts would have totalled £87,634. Some of the figures used in arriving at that calculation were the subject of criticism. Recognising some validity in the criticism, the pursuers compiled revised figures reflecting some of the criticism. I consider the revised figures to be reasonable.
Clause 4 of the offer of 30 April provided that any sums due by way of Sheriff Officers fees by Collection Agencies Limited should be waived. That meant the inclusion in the dissolution accounts of a figure representing the value of the Collection Agency fees written off, since normal practice in the business was to give credit to partners who had no interest in Collection Agencies Limited for the amount written off. The revisal made reduced the notional capital of £87,634 by £33,476.
Included in the dissolution accounts were figures for potential redundancy payments. These had no regard to the actual age of the employees involved. To allow for the possibility that all redundant staff would be of an age at which the appropriate multiplicand would be 1.5 times their weekly wage £14,685 would require to be deducted from the figure of £87,634. The revisal in relation to the figure for dilapidations was a deduction of £1,384, being based on the middle rather than lowest figure in a range of valuations. Under reference to Clark v Sutherland 1993 S.C. 320, 1993 S.L.T. 1299, the defenders argued that the lowest figure in the range should be used in the calculation. Clark deals with a quite different situation. I consider mid-range figures appropriate where the evidence is of an estimate of the range within which a cost or value is likely to fall. The final revisal was a deduction of £1,328 to reflect an under-calculation of the interest due in terms of Section 42(1) of the Partnership Act 1890 to the executors. I did not understand there to be a serious issue over any of the revised figures.
Against the final revised result must be set the value the pursuers actually received in respect of their own interests in Gray Scott & Co as a result of the missives, £76,024.
QUANTUM
Had I found that Mr McLeod's negligence caused loss to the pursuers I would have found them entitled to damages calculated as follows:
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Price paid under the missives
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£ 1,042,478.00 |
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|
Add
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||
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Settlement of executors' claim |
£ 500,000.00
|
|
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Costs of executors' claim
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£ 163,801.00 |
|
|
Capital due to pursuers on dissolution accounts at 30.4.92 |
£ 87,634.00 |
|
|
Less Revisals |
£ 50,873.00 £ 36,761.00 |
£ 36,761.00 £ 1,743,040.00
|
|
Less Assets acquired Value of interest in firm retained by pursuers
|
£ 1,092,745.00 £ 76,024.00 £ 1,168,769.00 |
£ 1,168.769.00 £ 574,271.00
|
INTERLOCUTOR
I shall repel the first and second pleas-in-law for the pursuers and the first and second pleas-in-law for the defenders. I shall sustain the fourth plea-in-law for the defenders and pronounce decree of absolvitor. I find it unnecessary to deal with the remaining pleas-in-law. As requested by both parties I have made no determination in respect of the counterclaim in relation to which no evidence was led before me.