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Cite as: [2007] CSOH 63, [2007] ScotCS CSOH_63

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OUTER HOUSE, COURT OF SESSION

[2007] CSOH 63

CA63/06

OPINION OF LORD REED

in the cause

TIMOTHY DESMOND MONTGOMERY

Pursuer;

against

CAMERON & GREIG and OTHERS

Defenders

________________

Pursuer: Coutts; Turcan Connell

Defenders: Howlin; Macbeth Currie

23 March 2007

Introduction

[1] The defenders in this action of accounting are a firm of veterinary surgeons. The pursuer was a partner in the firm until 31 December 2005, when he resigned. In this action he seeks to have the defenders account to him for the sums due to him on his resignation, in accordance with the partnership agreement, by production of the firm accounts from 2001 to date" so that the true balance due.... by the defenders... to the pursuer may be ascertained". He also seeks "an order in implement of clause 22.2 of the partnership agreement.... for valuation of heritable property owned or leased by the partnership".

The partnership agreement

[2] The rights of an outgoing partner are defined by clause 22 of the partnership agreement, which provides as follows:

"22 OUTGOING PARTNER'S SHARE

22.1 Where a Partner ceases to be a Partner other than by virtue of death,
Termination Accounts shall be prepared as soon as reasonably practicable after the Succession Date.

22.2 If requested by the Outgoing Partner or the Continuing Partners within three months from the Succession Date, any heritable property owned or leased by the Partnership comprised in the Partnership property shall be valued as at the Succession Date by a valuer agreed between the Outgoing Partner and the Continuing Partners or in the absence of such agreement, a valuer appointed by the Accountants. The expense of any such valuation shall be borne by the Outgoing Partner and the Continuing Partners equally.

22.3 Following the preparation of the Termination Accounts, the Outgoing Partner shall receive the following sums payable over three years from the Succession Date in quarterly instalments:

22.3.1 Any undrawn balance of the Outgoing Partner's share of the Net Profits as at the Succession Date as shown by such Termination Accounts after making provision for his share of any tax payable on the Nets Profits;

22.3.2 the amount shown standing to the credit of the Outgoing Partner's capital account in the Termination Accounts after adding or deducting the same proportion of the amount by which the valuation of the heritable property pursuant to 22.2 exceeds or falls short of the valuation of that property in the balance sheet immediately preceding Accounting Period (sic).

22.4 In preparing the Termination Accounts, the Accountants shall value all work-in-progress at the Succession Date after making any allowance for any bad or doubtful debts in accordance with the previous practice of the Partnership.

22.5 If any sum or instalment or part of it payable in terms of this Clause remains unpaid after the due date it shall bear interest at the rate of four per centum per annum above the Bank of Scotland's base rate from time to time calculated and compounded quarterly and apportioned on a daily basis.

22.6 If any instalment payable under this Clause is in arrears for more than fourteen days or the Continuing Partners fail to pay two instalments on the due dates then the whole amount or balance outstanding shall become immediately due and payable with any current interest compounded as at that date, notwithstanding the terms of Clause 22.5, and interest shall then be payable from the date the new balance is due at the rate specified in Clause 22.5."

[3 ] Several of the expressions used in clause 22 are defined by clause 1. In particular, clause 1 provides:

"1 DEFINITIONS AND INTERPRETATION
1.1 In this Agreement, the words and expressions listed below shall have
the following meanings:

'Accountants'	means Kidsons Impey of Kinross, or such other chartered accountants as the Partners may from time to time appoint;
'Accounting Date'	means 31 August in each year or such other date as the Partners may from time to time agree;
'Accounting Period'	means in the case of the first accounting period the period between the commencement of business and the next Accounting Date and for each subsequent Accounting Period means a period of 12 months from the preceding Accounting Date ending on the next following Accounting Date;
'Continuing Partners'	means the Partners who continue to be members of the Partnership after any Succession Date;
'Net Profits'	means the profits of the Partnership (other than profits of a capital nature) in respect of an Accounting Period before taxation but after charging all lawful expenses and outgoings of the Partnership;
'Outgoing Partner'	means a Partner who ceases to be a member of the Partnership for any reason other than death;
'Partners'	means the parties to this Agreement who carry on the business of the Partnership and any other person or persons admitted to the Partnership who agree to be bound by the terms of this Agreement (being Partners who shall not have ceased to be Partners under the provisions of this Agreement or otherwise) and any reference to a 'Partner' shall be construed accordingly;
'Partnership'	means the partnership formed by the Partners pursuant to this Agreement to carry on the business of veterinary practice;
'Succession Date'	means a date on which an Outgoing Partner is deemed under this Agreement to cease to be a Partner;
'Termination Accounts'	means the balance sheet prepared as at the Succession Date and the profit and loss account for the period from the immediately preceding Accounting Date to the Succession Date prepared by the Accountants in accordance with the accounting practice for the three preceding Accounting Periods....."

[4 ] The scheme envisaged by clause 22, read with clause 1, can be explained as follows. When a partner resigns, the accountants appointed by the partners are to prepare a balance sheet as at the date of resignation, together with a profit and loss account for the period from the preceding 31 August (the date as at which the last annual accounts will have been prepared, or will be due to be prepared) to the date of resignation. That balance sheet and profit and loss account are described as the termination accounts. They are to be prepared in accordance with the accounting practice for the three preceding annual accounting periods, subject to two qualifications. First, clause 22.2 provides for a valuation of heritable property as at the date of resignation, by a valuer agreed by the partners or otherwise appointed by the accountants, if such a valuation is requested within three months of the date of resignation. Secondly, under clause 22.4, the termination accounts are to include work in progress on the date of resignation, with provision for bad debts in accordance with the firm's previous practice. The resigning partner is then to be paid his share of the net profits for the period from the preceding 31 August to the date of resignation, as shown by the termination accounts, together with the amount shown standing in his capital account in the termination accounts (adjusted to reflect any revaluation of the heritable property), in accordance with clause 22.3, with interest (in the event of non-payment) in accordance with clauses 22.5 and 22.6.

[5 ] In relation to the firm's annual accounts, clause 9 provides:

"RECORDS AND ACCOUNTS
....

9.2 On the Accounting Date a profit and loss account and balance sheet for the Accounting Period shall be prepared by the Accountants of all the assets and liabilities of the Partnership and all dealings and transactions of the Partnership.

9.3 Before the Partners sign the annual profit and loss account of the Partnership, the partners shall determine what sums ought to be provided, reserved, and/or set aside for the following matters:

9.3.1 the payment of taxation in respect of each Partner's share of
the Partnership's profits;

9.3.2 the repayment of borrowings by the Partnership;

9.3.3 such provision as the Partners may consider reasonable to fund any agreed expansion of the Partnership's business or any replacement policy;

9.3.4 any matters or potential liabilities as the Partners may consider reasonable or prudent.

9.4 The Accounts shall be agreed and signed by all the Partners. When signed, the Accounts shall be binding on all the Partners except where any manifest error is identified by any Partner to the other Partners within fourteen calendar months after the approval of the Accounts...."

The term "Accounts" is defined by clause 1:

"'Accounts'

Means the profit and loss account and balance sheet prepared in accordance with Clause 10."

That reference to clause 10 must be a clerical error, clause 10 not being concerned with accounts: the intended reference must be to clause 9.

[6 ] It is also relevant to note the provisions of clause 28, which apply on the termination of the partnership (the partnership not being terminated by the resignation or death of a partner, by virtue of clause 18):

"DETERMINATION OF THE PARTNERSHIP

24.1 Upon the determination of the Partnership a full and general account
shall be prepared by the Partnership's Accountants of all assets, credits, debts, liabilities, work-in-progress and other business of the Partnership.

24.2 The assets and undertaking of the Partnership shall be sold, realised and got in by the most efficient and profitable manner as the Partners unanimously agree is appropriate but in the event of any dispute, as determined by the Accountants."

[7 ] Finally, the provisions of clause 11 concerned with decision-making by partners require to be noted:

"11. MEETINGS AND VOTING

......

11.6 All matters relating to the management and conduct of the affairs of the Partnership shall be decided by a majority of the Partners except for the following matters which shall require a unanimous resolution of all the Partners:

11.6.1 the borrowing or lending of any sum in excess of £2,000;

11.6.2 the purchase of any asset or assets in excess of £2,000 in value,
individually or in aggregate;

11.6.3 the giving of any guarantee;

11.6.4 the opening of any new branch office;

11.6.5 the sale of any of the Partnership's premises;

11.6.6 any increase in the capital of the Partnership;

11.6.7 the introduction into the Partnership of a new Partner (whether profit sharing, salaried or otherwise)."

The background to the present proceedings

[8 ] It appears that the firm's accountants, Messrs Ross McConnell, prepared annual accounts for the periods up to 31 August 2004, which were agreed and signed by the partners. Up until the year ending 31 August 2000, the balance sheet did not include any figure in respect of goodwill. In the balance sheet as at 31 August 2001, however, goodwill was included, at a figure of £260,000. A note to the accounts, setting out the "accounting policies" (as they were described) which had been followed, stated:

"Goodwill has been valued by the partners, and included in the accounts at that valuation".

The circumstances in which goodwill came to be included, and the basis of the sum which was stated, are matters in dispute between the parties. The pursuer maintains in his pleadings that goodwill was included as a tax planning measure, at a sum calculated by the accountants. The defenders maintain that it was included at the request of the pursuer, subject to an agreement that in the event of any partner ceasing to be a partner he would not be entitled to any payment in respect of goodwill. They also maintain that the sum at which it was stated was too high. Be that as it may, goodwill was similarly included, at the same figure, and with the same note to the accounts, in the balance sheets as at 31 August 2002, 2003 and 2004. Those accounts were agreed and signed.

[9 ] Draft accounts were prepared for the year ending 31 August 2005. The balance sheet again included goodwill, at the same figure, and with the same explanatory note. After the pursuer gave notice of his resignation, it became apparent that there was a dispute as to whether goodwill, valued at the sum stated in the earlier agreed accounts, should be taken into account in calculating the amount to which he was entitled. Relying on clause 9.4, the defenders maintained that the inclusion of goodwill at a value of £360,000 in the 2004 accounts had been a manifest error. The firm's accountants then produced revised accounts for the year to 31 August 2004, including goodwill at a figure of £200,000, with the same explanatory note as before. They also produced revised accounts for the year to 31 August 2005, including goodwill at a figure of £100,000, with the same explanatory note as before. They also produced termination accounts as at 31 December 2005, including goodwill at a figure of £80,000, with the same explanatory note as before.

The present proceedings

[10 ] As I have explained, the present proceedings take the form of an action of accounting. Although the conclusion refers to the accounts from 2001 to date, it appears that the pursuer is concerned principally with the termination accounts: his interest in the earlier accounts arises from the requirement that the termination accounts should be prepared "in accordance with the accounting practice for the three preceding Accounting Periods". In a note setting out the pursuer's proposals for further procedure, it is stated that since termination accounts have been produced, the pursuer should now be allowed to lodge a note of objections to those accounts. The objections would relate, first, to the figure at which goodwill is stated, and secondly, to the figure at which the value of freehold property is stated. In relation to the second matter, the pursuer's complaint appears to be that account has not been taken of a refurbishment which took place after the property was last valued. The pursuer would then seek a proof in respect of the objections and any answers for the defenders, so that the court could determine the true balance due.

[11 ] In response, the defenders challenge the relevancy of the pursuer's pleadings and seek the dismissal of the action, essentially on the basis that the pursuer has not stated any relevant ground of challenge to the termination accounts which have admittedly been produced.

[12 ] In those circumstances, a debate was allowed on the defenders' preliminary plea, of consent of both parties.

The submissions on behalf of the defenders

[13 ] Counsel for the defenders submitted that, in the first place, the pursuer had not set out a relevant case that there had been any failure by the defenders to comply with an obligation to account to the pursuer. Clause 22 required the preparation of termination accounts. Under clause 1, the termination accounts had to be prepared by the accountants appointed in accordance with the agreement. Termination accounts had been prepared by the appropriate accountants. There has been no failure by the defenders to comply with their obligations in that regard.

[14 ] It was in any event not open to the pursuer to challenge the termination accounts, at least in the absence of any suggestion of bad faith. Clause 22 contained no express term permitting the termination accounts to be challenged, and there was no room for an implied term. A term permitting challenge did not require to be implied in order to give the partnership agreement business efficacy, and no such term could be said to be so obvious that its inclusion went without saying. In any event, such a term would be lacking in certainty.

[15 ] In that regard, clause 22 was to be contrasted with clause 9. Although the annual accounts were to be prepared by the accountants, the partners themselves had the power to determine the amount of any provision or reserve in respect of taxation and other contingent liabilities, before signing the accounts. The annual accounts had to be agreed and signed by all the partners before they could be binding upon them. The annual accounts could be challenged, but only within a specified period (viz. within fourteen months of approval) and on one specified ground (viz. manifest error).

[16 ] Given that termination accounts might well be contentions, it was striking that clause 22, unlike clause 9, did not involve the partners to any extent in their preparation, made no provision for their approval by the partners, and made no provision for their being challenged. The intention must be that the outgoing and continuing partners would alike be bound by the accounts prepared by the designated accountants. In that regard, it was relevant that the termination accounts were merely bringing the position up to date from the last annual accounts (subject to any revaluation of heritable property requested under clause 22.2, and the valuation of work in progress under clause 22.4), and were to be prepared in accordance with the accounting practice followed in the earlier annual accounts. Deferral to the decision of the accountants, as independent decision-makers, could also be seen elsewhere in the partnership agreement, for example in clause 22.2 ("in the absence of .... agreement [on the choice of a valuer] a valuer appointed by the Accountants") and clause 24.2 ("in the event of any dispute, as determined by the Accountants").

[17 ] It followed that the termination accounts, provided at least they were prepared in good faith, were not open to challenge. If the outgoing partner were dissatisfied with the accounts, his remedy (if any) lay against the accountants.

[18 ] In support of these submissions, reference was made to McLaren, Court of Session Practice, pages 656-657, Lindley & Banks on Partnership, 18^thedition, paragraphs 10-73, 10-157, 10-159, 10-172, and 10-174, Smith v Gale [1974] 1 W.L.R. 9, Campbell v Edwards [1976] 1 W.L.R. 403 and Wylie v Corrigan 1999 S.C. 97.

[19 ] In discussion, I understood counsel to accept that if termination accounts were produced which had not been prepared in accordance with the agreement (e.g. because they did not adhere to previous accounting practice), such accounts could be challenged as not being "termination accounts" within the meaning of the agreement, possibly in an action of declarator, and that the preparation of proper termination accounts might then be compelled, by an order for the specific performance of clause 22. That was not however the present form of action.

[20 ] Nor were there in any event any relevant averments to the effect that the termination accounts had not been prepared in accordance with the agreement. So far as the value attached to freehold property was concerned, the pursuer's complaint was that no account had been taken of a refurbishment; but the pursuer did not aver that a revaluation had been requested, in accordance with clause 22.2.

[21 ] So far as goodwill was concerned, the pursuer's complaint was that it was stated at a different figure from the figure appearing in earlier accounts; but the figure at which it was stated was not an "accounting practice". The expression "accounting practice" was not defined in the agreement, and accordingly bore its ordinary meaning. It was broadly synonymous with cognate expressions such as "accounting principles" and "accounting policies". It referred to such matters as whether goodwill and work in progress were to be valued, whether the firm was to be presumed to be carrying on business as a going concern, the adoption of historic costs or current values, the depreciation policy and the provision for bad debts. That interpretation of the expression was consistent with clauses 22.2 and 22.4, which made provision for two specific departures from previous accounting practice in relation to the revaluation of heritable property and the valuation of work in progress. It was also consistent with the use of the expression "accounting policies" in the partnership accounts, in relation to such matters as the manner in which turnover was calculated, the depreciation policy, the manner in which stocks were valued and, significantly, the basis upon which goodwill was valued. The only "accounting practices" as regards goodwill were, first, to include goodwill as an asset in the balance sheet, and secondly, to include it at a value determined by the partners. In that regard, a decision could be taken by a majority of the partners, in accordance with clause 11.

[22 ] The notion that a particular balance sheet item should be replicated at the same amount from one year to the next as a matter of "accounting practice" was foreign to any ordinary meaning of the term, not least because the value of goodwill would fluctuate with the fortunes of the firm.

[23 ] In support of these submissions, reference was made to Lindley & Banks, at paragraphs 10-73 to 10-74, to Schedule 4 to the Companies Act 1985, and to the Statements of Standard Accounting Practice issued by the Accounting Standards Committee (now replaced by the Accounting Standards Board, which issues Financial Reporting Standards, although SSAPs continue in force until replaced by new guidance).

The submissions on behalf of the pursuer

[24 ] Counsel for the pursuer submitted that the defenders were bound to render a true account to the pursuer. That duty was imposed by the common law and by section 28 of the Partnership Act 1890, and was not excluded by the partnership agreement. The termination accounts prepared by the firm's accountants were therefore not binding upon the pursuer, even if they had been prepared in accordance with the provisions of the agreement, if they were not true accounts. Nothing in clause 22 conferred finality on the termination accounts: unlike clause 9, it did not provide that such accounts were to be binding on the partners. The pursuer was therefore entitled to object to the termination accounts, if he did not accept that they correctly stated what he was entitled to. The correct form of process for such objections was an action of accounting. It would be open to the court to substitute different figures for those objected to, so as to produce a true account. The action was at the stage of determining whether there was a liability to account. The court had not yet ordered the lodging of a note of objections. It was premature to consider whether the pursuer's objections to the termination accounts were relevant. Those objections had not yet been fully stated.

[25 ] In discussion, counsel acknowledged that, if there had been a failure to comply with a timeous request for a revaluation of heritable property in accordance with clause 22.2, the pursuer might have sought an order for specific performance. That did not however mean that an appropriate remedy could not be obtained in an action of accounting: the latter was a flexible form of process. Equally, if it was necessary, under clause 22.2, for the value to be fixed by a valuer appointed by the accountants, the court could remit the matter to such a valuer to fix the true value. The pursuer's complaint was that there had been no change in the valuation of the heritable property to reflect a refurbishment which had taken place during the intervening period. The revaluation of heritable property had been sought by the pursuer before his resignation, and reminders had been sent during the three months following his resignation.

[26 ] So far as goodwill was concerned, counsel submitted that, even if termination accounts prepared in accordance with the agreement were binding on the pursuer, the pursuer was not bound by the accounts produced, since the defenders had purported to alter the accounting practice followed in the preceding annual accounts without having identified anything which could properly be described as a manifest error, within the meaning of clause 9.4. The carrying forward of goodwill at a constant figure in the accounts since was an accounting practice which had been followed in the annual accounts since 2001. Alternatively, the inclusion of goodwill as "valued by the partners" was an accounting practice, as stated in the notes to the annual accounts. The revaluation of goodwill, without the agreement of all the partners (including the pursuer) was therefore a departure from the accounting practice previously followed. It was necessary to find out the basis of the figure for goodwill in the 2001 accounts, since that figure had been carried forward. It was for that reason that the summons sought an accounting in respect of accounts from 2001 to date.

[27 ] In support of these submissions, reference was made to the authorities previously mentioned, to Walker, The Law of Civil Remedies in Scotland, pages 304-306, and to the definition of "practice" in the Oxford English Dictionary.

Discussion
[28] An important question in the present case is the status of the termination accounts. Under clause 9.4, the annual accounts are conclusive once they have been agreed and signed, subject to the proviso that each partner is entitled to have the accounts corrected in the event that any "manifest" error is identified within a prescribed period, and provided also that all parties have acted bona fide. As Lord Lindley stated in an earlier edition of Lindley on Partnership, quoted in the 18^th edition at paragraph 10-73:

"A provision to this effect is extremely useful, and should never be omitted; but, however, stringently it may be drawn, no account will be binding on any partner who may have been induced to sign it by false and fraudulent representations, or in ignorance of material circumstances dishonourably concealed from him by his co-partners. Where, however, all parties act bona fide, such clauses are operative; but the usual provision as to manifest errors applies only to errors in figures and obvious blunders, not to errors in judgment, e.g. in treating as good debts which ultimately turn out to be bad, or in omitting losses not known to have occurred. All errors are manifest when discovered; but such clauses as those referred to here are intended to be confined to oversights and blunders so obvious as to admit of no difference of opinion".

[29 ] Clause 22 does not contain any similar provision. Nevertheless, it appears to me to be implicit in clause 22 that termination accounts prepared in accordance with its terms (read with the definitions in clause 1) are conclusive, provided again that all parties have acted bona fide.

[30 ] There are a number of aspects of clause 22 which point towards that conclusion. First, clause 22.3 provides that the outgoing partner "shall" receive sums brought out as due to him by the termination accounts: he is to receive those sums in instalments, in accordance with a specified timetable, "following the preparation of the Termination Accounts", without the necessity of those accounts being agreed or approved. In the event that there is any delay in the payment of any such instalment, "it shall bear interest" in accordance with clause 22.5; and in the event that any such instalment is more than fourteen days in arrears, the whole amount outstanding in terms of the termination accounts "shall become immediately due and payable" in accordance with clause 22.6. The implication of these provisions is that the termination accounts are the measure of the amount owed by the continuing partners to the outgoing partner, and that they are therefore binding on all the partners.

[31 ] That conclusion is consistent with the purpose of the termination accounts, and with the provisions regulating the manner in which they are to be prepared. When a partner resigns and has to be paid the share of the partnership assets to which he is entitled, it is ordinarily in his interest that the value of those assets should be maximised, whereas it is ordinarily in the interest of the continuing partners that the value should be minimised. In such a situation, a requirement that termination accounts had to be approved or agreed, in order to be binding upon the partners, would be liable to result in difficulty. The willingness of the partners to accept the decision of their accountants, in situations where they would otherwise be in conflict with one another, is evident from other provisions of the agreement, notably clauses 22.2 and 24.2. It is particularly understandable that the partners should have impliedly agreed to be bound by the termination accounts prepared by the accountant when the definition of those accounts in clause 1 is borne in mind: the identity of the accountants has been agreed by the partners, the preparation of the accounts is essentially a question of bringing the position shown in the last annual amounts up to date, and the accounts are to be prepared (subject to clauses 22.2 and 22.4) in accordance with the accounting practice followed in the three previous sets of annual accounts.

[32 ] Provided termination accounts are prepared in good faith in accordance with the agreement, they are therefore binding on the partners. That would be so even if the valuation of the assets in the termination accounts did not represent their fair or market value (if, for example, the accounting practice was to value assets at their original or depreciated book value): see, for example, Coventry v Barclay (1864) 3 De G.J.&S 320, Ex parte Barber (1870) L.R. 5 Ch.App.687, Cruikshank v Sutherland (1923) 92 L.J. Ch. 136); Thom's Executrix v Russel & Aitken 1983 S.L.T.335 and Re White [2001] Ch.393. If, on the other hand, the termination accounts have not been prepared in good faith in accordance with the agreement, then it follows that they are not binding on the partners under their contract.

[33 ] The authority on which counsel for the defenders principally relied, in support of his submission that termination accounts produced by the duly appointed accountants could not be challenged, was Campbell v Edwards. That was a case concerned with a valuation carried out by an agreed valuer, which was sought to be challenged on the basis that, since another valuer had provided a different valuation, the valuation in question must be wrong. Unsurprisingly, the statement of claim was struck out as disclosing no cause of action. Lord Denning M.R. said, at page 407:

"It is simply the law of contract. If two persons agree that the price of property should be fixed by a valuer on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it".

The position would plainly be otherwise if there were fraud or collusion, as Lord Denning observed. Equally, the parties would not be bound if the valuation was not made in accordance with the terms of the parties' agreement, (unless the departure from the agreement was immaterial), since it would not then be a valuation by which the parties had agreed to be bound. I note that that conclusion is consistent with the discussion in Frank H Wright (Construction) Ltd v Frodoor Ltd [1967] 1 W.L.R. 506 at pages 524-526 per Roskill J, and Smith v Gale [1974] 1 W.L.R. 9, amongst other authorities.

[34 ] The next question which arises is the appropriate form of action, in the event that termination accounts are said not to have been prepared in accordance with the agreement. One possibility would be an action of declarator, as in Noble v Noble 1965 S.L.T. 415, 1983 S.L.T. 339 and Thom's Executrix v Russel & Aitken 1983 S.L.T. 335. Another possibility, if the parties so agreed, would be a petition for summary trial, as in Shaw v Shaw 1968 S.L.T. 94. An action of accounting is however also in my view a competent form of process. Although the contractual provision for the accounts to be prepared by particular accountants on a particular basis which is not the fair or market value differentiates the present case from some other actions of accounting, the court can nevertheless determine, in an action of accounting, whether the accounts which have been produced by the accountants in question have been prepared in accordance with the agreement (as the court considered in Wylie v Corrigan, at page 102). If the accounts have not been so prepared, the court can require the continuing partners to produce fresh accounts, prepared in accordance with the agreement and bringing out the balance properly due to the pursuer, and can then grant decree for payment of the balance so brought out, in accordance with the agreement.

[35 ] An action of accounting usually has two distinct stages. The first stage is concerned with the question whether the court should order the defender to produce an account. If such an order is made, and an account is produced, the second stage of the action is concerned with the pursuer's objections to that account, and is designed to ascertain the amount properly due. Typically, therefore, the pursuer's pleadings at the initial stage are designed to set out the basis on which the defender is said to be under a liability to account; and it is only after an order has been made for the production of an account, and an account has been produced, that the court then requires the pursuer to lodge a note of objections, setting out the basis on which the account produced is said not to be in accordance with the pursuer's entitlement.

[36 ] This form of procedure is not however invariably the most appropriate. Where an account has already been produced, and the issue between the parties is whether the account has been properly prepared, the court can proceed directly to a consideration of the pursuer's objections to the account, and the defender's answers to those objections. In that regard, I agree with the opinion of Lord Maxwell in Cunningham-Jardine v Cunningham-Jardine's Trustees 1979 S.L.T. 298, where his Lordship rejected both a contention that, where accounts had admittedly been provided, an action of accounting was incompetent, and also a contention that, in such a situation, it was only at the stage when the court ordered the lodging of a note of objections that it was possible for the pursuer's claim to be formulated. In relation to the latter point, his Lordship said (at page 300):

"This I think is a matter of practice rather than law. As matter of practice in my opinion in a case such as this where the pursuer has received accounts and accordingly, unlike the situation where there are no accounts, is in as good a position to formulate the claim as she would be after the formal lodging of the accounts, it would be better that the summons in the action should state the basis in law and amount of the pursuer's claim ....There is precedent for specifying the claim in the summons and not waiting for the stage of lodging objections to the account (Donald v Hodgart's Trustees (1893) 21R. 246). I think it the proper practice and I think it could well save unnecessary procedure and expense".

I note that in Donald v Hodgart's Trustees the ground on which the accounts were challenged was focused in a conclusion for declarator. That may be a convenient mode of procedure in many cases where accounts have been produced, including the present case.

[37 ] It therefore appears to me that the grounds on which the pursuer challenges the termination accounts should be fully specified. If these proceedings concerned only the termination accounts, I might have followed the same course as Lord Maxwell in the Cunningham-Jardine case, and ordered the formal lodging of the accounts and of a note of objections. For reasons which I shall explain, however, an amendment of the present summons will be necessary; and advantage can be taken of that opportunity to set out fully in the amended summons the basis on which the pursuer challenges the termination accounts which have been produced, with suitable declaratory conclusions if appropriate.

[38 ] These proceedings are not however concerned solely with the termination accounts. In the conclusion for accounting as it presently stands, the pursuer seeks an accounting in respect of every year from 2001 to date. It nevertheless appears that it is only the annual accounts for the years ending 31 August 2004 and 31 August 2005 which are in dispute. The accounts for the earlier years appear to be settled: it is not suggested that they are other than binding on the parties, in accordance with clause 9.4. Although it may be argued that the contents of those accounts, and the basis on which they were prepared, are relevant in determining whether subsequent accounts, including the termination accounts, have been prepared in accordance with the parties' agreement, that contention does not involve the re-opening of the settled accounts.

[39 ] In relation to the accounts for the year ending 31 August 2004, it appears that accounts were agreed and signed, but that the defenders subsequently claimed to have identified a manifest error in respect of the valuation of goodwill. Revised accounts were then prepared. There appears to be a question between the parties as to whether the original accounts are binding on the parties: a question which depends on whether there was a manifest error within the meaning of the agreement, and possibly also on whether any such error was timeously identified. These are questions which could be focused by means of a declaratory conclusion. There may also be a question whether, in the event that the original accounts are not binding, the revised accounts have in any event been prepared in accordance with the agreement, and possibly as to whether they have been agreed and signed in accordance with the agreement. Since the revised accounts have been produced, any objections to them, or questions as to their status, could properly be stated in the pleadings at this stage.

[40 ] In relation to the accounts for the year ending 31 August 2005, it appears that accounts were prepared which included goodwill at a certain valuation, and that revised accounts were subsequently prepared which included goodwill at a different valuation. It is not apparent from the pleadings that either set of accounts has been agreed and signed. Since both sets of accounts have been produced, any objections to them, and questions as to their status, can be stated in the pleadings at this stage.

[41 ] If the argument presented by counsel for the defenders as to the meaning of the expression "accounting practice" is accepted, then it is possible that the need to determine the issues between the parties in relation to the annual accounts for 2004 and 2005 may be capable of being elided. That however cannot be determined at this stage. It was apparent from the submissions of counsel for the pursuer that the objections to the termination accounts (and the annual accounts in issue) have not as yet been fully stated. It would be premature to express any view on the competing arguments until the objections have been fully stated and answered.

[42 ] In the circumstances, the case will be put out for a hearing By Order, so that future procedure can be considered in the light of this Opinion.