EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Clarke Lady Dorrian Lord Marnoch XA190/08	[2010] CSIH 38 OPINION OF LORD CLARKE in the Appeal by the defenders and cross appeal by the pursuer in the commercial action JOHN KENNEDY FORSTER Pursuer & Respondent; against MESSRS FERGUSON & FORSTER, MACFIE & ALEXANDER & OTHERS Defenders & Appellants: _______

Pursuer & Respondent: Bartos; Burness WS

Defenders & Appellants: Dunlop; Drummond Miller LLP (for Charles Hennessy & Co, Glasgow)

30 April 2010

Introduction

[1] This is an appeal from a decision of the Sheriff Principal of Glasgow and Strathkelvin by the defenders in a commercial action. The respondent was a qualified solicitor who, from 12 May 1997 until March 2000, was a partner in the firm of Messrs Ferguson and Forster, MacFie and Alexander who are the defenders in this action along with the two remaining partners of the partnership. On 3 December 2003, the respondent appeared on indictment at the High Court in Glasgow charged with eighty one counts of embezzling clients' funds and fourteen contraventions of the Bankruptcy (Scotland) Act 1985, Section 67(6). He pled guilty to thirty five of the charges of embezzlement and six breaches of the Bankruptcy Act, Section 67. He was sentenced on 14 March 2004 to a period of five years' imprisonment in respect of the embezzlement charges and eighteen months' imprisonment in respect of the breaches of the Bankruptcy Act, the latter period to run concurrently with the five year sentence imposed in respect of the embezzlements. Twenty three of the crimes of embezzlement took place during the currency of his partnership with the appellants which, as has been noted, commenced on 12 May 1997 in terms of a partnership agreement of that date. The other embezzlements had taken place when the respondent was a partner in a differently constituted partnership.

[2] In the present action the respondent seeks implement of a provision of the partnership agreement. The first crave in the Initial Writ is in the following terms:

"To ordain the defenders to implement their obligation to pay the pursuer a pension in terms of clause FIFTEEN(e) of the Partnership Agreement dated 12 May, 1977 (sic) by which the parties, being partners of the firm of Ferguson & Forster, MacFie & Alexander, agreed that on inter alia the retirement of the pursuer, the pursuer may elect to receive in lieu of any sum due to him or his estate in respect of the goodwill and work in progress of the said partnership a pension for the period of ten years, payable to him equal to one quarter of his average income calculated on the previous three years gross income."

The second crave proceeds to seek payment of the sums claimed to be due to the respondent in implement of the foregoing obligation. The second crave is in the following terms:

"For payment by the defenders to the pursuer of the sum of ONE HUNDRED AND NINETY SIX THOUSAND SIX HUNDRED AND FIFTY FIVE POUNDS STERLING (£196,655), with interest thereon at the rate of eight per cent a year from the date of the Interlocutor to follow hereon until payment; and for declarator that the defenders are bound to pay to the pursuer each year commencing on 24th March, 2004 and until the 24th March, 2011, an annual sum of THIRTY NINE THOUSAND THREE HUNDRED AND THIRTY ONE POUNDS STERLING (£39,331) with interest thereon at the rate of eight per cent a year from the time same shall become due and payable and remain unpaid".

The provision of the Partnership Agreement, relied upon by the respondent is clause FIFTEEN(e) which is in the following terms:

"On the death or retirement of the First Partner he or if he shall have died his personal Representative, may elect to receive in lieu of any sum due to him or his estate in respect of the goodwill and work in progress of the Partnership a Pension for the period of 10 years, payable to him or if he had died to his wife or representatives equal to one quarter of the First Partners average income calculated on the previous three years gross income."

The Partnership Agreement defined 'The First Partner' as the respondent.

It can be seen that clause FIFTEEN(e) is a provision which is for the benefit of the respondent alone. None of the other partners had such a benefit conferred in their favour.

[3] Before this court it was contended, on behalf of the appellants, that the respondent by his repeated acts of embezzlement carried out during the duration of the partnership, had been in material breach of the obligation of utmost good faith which was owed by each of the partners to each other and which is of the essence of any partnership agreement. That, it may be said, was not ultimately disputed by counsel for the respondent, but before this court, as was the position in the courts below, it was argued, on the respondent's behalf, that he was not thereby disentitled from recovering payment of the significant sums sought in the second crave in terms of the partnership agreement.

The Decisions Of The Courts Below

[4] The sheriff, at first instance, Sheriff Peebles, (as he then was) dismissed the respondent's action. He did so by finding that the respondent had been in material breach of his contract with the appellants and that, by operation of the doctrine of mutuality of obligations, he could therefore, not sue on the agreement. In his decision regarding expenses of 4 December 2006 the sheriff (appeal print page 42) stigmatised the respondent's case as being "wholly unstateable". Before the Sheriff Principal, however, a different view was taken of matters. The Sheriff Principal, in particular, repelled the appellants' third plea-in-law which is in the following term "the pursuer being in material breach of contract with the defenders is not entitled to enforce the contractual obligation provided in the Partnership Agreement and the action should be dismissed" and deleted certain of the appellants' averments, including averments regarding material breach of the partnership agreement. The Sheriff Principal's approach to the case was, apparently, driven by the view he took of the combined effect of clauses TWELVE and FIFTEEN when read together. Clause TWELVE is in the following terms:

"If any Partner shall

(a) become apparently insolvent or enter into any composition or arrangement with or for the benefit of his creditors generally;

(b) commit any act of gross professional misconduct;

(c) do any act of a serious nature prohibited by Paragraph 11;

(d) grossly neglect the Partnership business;

(e) fail to account for and pay over or refund any monies for which he is accountable to the Partnership within seven days of being requested in writing to do so by any Partner;

(f) act in such a way as to bring his name or the name of the Partnership into disrepute;

(g) act in any respect contrary to the provision (sic) of this Agreement (not being a trivial nature (sic)) or to good faith between the Partners;

then in any of these events, the other Partners may expel the Partner concerned with effect from such date as they shall specify in a written notice given by the other partners or such Partner and the partner so expelled shall be deemed to have retired from the Partnership on such date. Save that in the event of any matter alleged under sub paragraph (f) or (g) hereof the other Partners shall first give the offending Partner notice requiring him to rectify any matter capable or (sic) rectification and/or that any such conduct may lead to notice being given under this clause and the other Partners shall only be entitled to give such notice in the event of the offending Partner failing to comply with any such notice to rectify any matter capable of rectification and/or repeating the alleged act or other act of a similar nature."

(It should be noted that while the discussion in the lower courts and in this court focussed on the respondent's conduct amounting to breach of the duty of utmost good faith among the partners, it seems that it could also be regarded as gross professional misconduct and involved actings which would bring his name and the name of the partnership into disrepute. Accordingly the operation of clause TWELVE could have been, in my opinion, brought into play having regard to the provisions of TWELVE(b) and (f) as well as by TWELVE(g)). The remaining provisions of clause FIFTEEN, apart from FIFTEEN(e), are as follows:

" Each Partner shall: (sic)

(a) The death or retirement of any Partner shall not necessarily determine the Partnership among the others.

(b) On the death or retirement of any of the Second, Third or Fourth Partners the First Partner shall have the option to acquire that deceased or retiring Partner's interest in the Partnership for a consideration equal to his interest at the date of death or retirement as determined by accounts drawn to that date. The foresaid option shall be exercised by the First Partner within three months from the date of death or retiral.

(c) On the death or retirement of the First Partner each of the Second, Third and Fourth Partners shall have the option, to be exercised in writing within three months from the date of death or retirement of the First Partner, to acquire his interest in the Partnership in accordance with a set of accounts to be drawn as at the date of death or retirement incorporating.

(i) Any heritable property at the then open market value with vacant possession.

(ii) The goodwill and work in progress at a combined value which will be a sum equal to one third of the annual gross fee income of the firm for the three preceding years.

(iii) The whole other assets of the firm including all furniture, fixtures, equipment, stationery, text books at their net value on a written down value for tax purposes

(d) In the event of the option contained in paragraph 16c (sic) hereof not being exercised as to the entirety of the first partners interest in the Partnership the Partnership shall be wound up. In that event the First Partner or his Executors heirs and Assignees shall have the right to acquire the practice as if the Second, Third and Fourth Partners had retired and the First Partner had exercised his option to acquire their share as hereinbefore provided.

....

(f) Any valuation required for the purposes of this paragraph shall be agreed between a Valuer appointed by the Partners and in default of agreement shall be fixed by a Valuer nominated by the President for the time being from the Law Society of Scotland. The cost of any such Valuation shall be an expense of the Partnership."

[5] The Sheriff Principal, having referred to the concept of mutuality of contract, under reference to various authorities dealing with retention, defined the question required to be answered in the present case as being as follows:

"Is the contractual obligation undertaken by the defenders to pay to the pursuer a pension the counterpart of the obligation of the pursuer not to defraud clients and not to breach the fiduciary duty owed to his partners?"

(para 10 of the Sheriff Principal's Note). Having posed that question the Sheriff Principal then went on to say this:

"The contract might be thought to be weighted in favour of the pursuer. However it is not for the court to re-write the obligations which the parties respectively undertook. Clause 15 deals with retirement. Clause 15(c) provides that on the pursuer's retirement the remaining partners can opt to acquire the pursuer's interest in the partnership. That interest is said to include inter alia the goodwill and work in progress of the firm. Clause 15(e) gives to the pursuer upon retirement the right to elect to receive, instead of a lump sum representing goodwill and work in progress, a pension calculated by reference to a formula. Clause 12 provides that if any partner performs a variety of acts, including acting in such a way as to bring his name or the name of the partnership into disrepute or acting in any respect contrary to good faith between the partners, then that partner may be expelled. The clause goes on to say that

'The partner so expelled shall be deemed to have retired from the partnership on such date.' Thus if a partner brings the firm's name into disrepute and is expelled that is deemed by the agreement to be the equivalent of a retiral from the firm. As has been seen a retiral entitles the retiring partner, as his option, to payment of a pension instead of a lump sum representing goodwill and work in progress. I accept that in this case the defenders did not expel the pursuer which they would have been entitled to do. The pursuer beat them to it and resigned albeit not in accordance with Clause 13. Clause 13 required that the retiring partner should give not less than six months notice in writing. The pursuer retired with immediate effect. A consideration of the foregoing gives an insight into what was in the minds of the parties at the time they entered into the contract. Notwithstanding expulsion, perhaps for breaching the duty of good faith to his partners, a partner was entitled to receive the balance on his capital account. Conforming to the criteria set out in Clause 12 was not considered by the signatories to the contract to be a counterpart of being entitled to payment of one's capital. I agree with Mr Bartos that this is a very powerful indicator that in relation to this particular contract the actings of the pursuer, reprehensible though they were, do not entitle the defenders, per se, to withhold payment to the pursuer of what would otherwise be due to him from his capital account. The parties would appear not to have intended that acting in good faith was a counterpart obligation to being paid one's capital upon being expelled from the firm."

The Sheriff Principal then continued as follows:

"If the actings of the pursuer have not in any way damaged the financial position of the firm there does not seem any good reason why the remaining partners should receive a windfall represented by the pursuer's capital. The fact that the contract provides that the capital can be received in instalments as a pension is irrelevant. In the context of a contract of employment the duty of good faith owed by the employer to the employee has been said on many occasions to go to the heart of the employer/employee relationship. In the context of a partnership agreement I am of the view that a breach by one partner of the fiduciary duty owed to the other partners also goes to the heart of the contract. Such a breach might entitle the other partners to expel the partner in breach. Indeed that is what the partnership agreement provided in this case. However it does not follow that the expelled partner is not entitled to receive the balance at credit of his capital account."

On that footing the Sheriff Principal reached the conclusion that the appellants' third plea‑in‑law should be repelled, certain of their averments regarding material breach should be excluded and otherwise remitted the cause for the sheriff to proceed as accords. It will be noted that the Sheriff Principal's disposal of the matter was, in effect, predicated on his equiparating the right of the respondent to receive any sum due to him on his capital account on dissolution of the partnership with a right to be paid a pension in terms of clause FIFTEEN(e).

The Appellants' Submissions

[6] In opening his submissions before this court, counsel for the appellants formulated the question for the court as being "Do the admitted embezzlements by the respondent in material breach of the partnership agreement with the defenders disable him from suing for any pension entitlement under the agreement?"

[7] Having posed the question in those terms, counsel invited the court to answer it in the affirmative because the respondent, it was said, was disqualified from suing in respect of a purely personal right arising from his contract with the appellants and in respect of which contract he was in material breach. The Sheriff Principal, it was argued had conflated two separate and distinct interests which arose in the context of this case. The first was a property right in the respondent in respect of any sum shown to be due to him on his capital account on dissolution of the partnership. The second was a contractual right arising from clause FIFTEEN to require payment to him of an annual pension for a period of ten years. The respondent's material breach of contract may not have defeated the first of those rights in that Scots law did not require confiscation for material breach of contract. It did not follow, however, that the respondent could otherwise sue on the contract in respect of which he had been in material breach for rights purely contractual in nature and not of a proprietary quality.

[8] The other error to be discovered in the Sheriff Principal's reasoning was his suggestion that there was no mutuality between the obligation sued upon and the obligation of which the respondent was in material breach. The respondent, in the present case, was not seeking payment of the sum (if any) due to him on his capital account. What he sought were payments to him to be made annually for a period of ten years calculated by reference to gross income during the three years prior to his resignation. It was, it was said, a matter of agreement that the respondent had intimated his retirement from the firm on 24 March 2000. He was not expelled from the firm. Therefore the provisions of clause TWELVE did not come into play. In effect what had happened was that the respondent, aware that he had subverted the goodwill of the firm by his actings and that, accordingly, there would be unlikely to be any capital to be paid to him from his capital account, was electing to have a pension instead. The basic plank of the respondent's case appeared to be that the wording of clause TWELVE meant that the appellants could not rely on the respondent's material breach of contract and the mutuality principle when he sought to enforce clause FIFTEEN(e) but, properly understood, the provisions of clause TWELVE did not evince an intention on the part of the parties to the partnership agreement that it would have such an effect, namely, to disentitle the appellants from praying in aid the principle of mutuality of contract in defence of a claim of the present kind.

[9] Reference was made to textbook materials and authorities. In McBryde The Law of Contract in Scotland (3^rd edition) the writer at para 20-47 sets out the following propositions.

"The concept of mutuality involves at least five ideas:

(1) A party who is in breach of obligations cannot enforce performance by the other party.

(2) The party who is not in breach may withhold performance until the other has performed or is seen to be willing to perform the counter stipulations. Once the breach ends, so does the right to suspend performance. The party who is entitled to withhold performance may also be entitled to quantify a claim as damages or sue for sums due under the contract.

(3) The mutuality concept only applies if the obligations of the parties are the causes of one another or are reciprocal undertakings.

(4) The operation of the principle can be affected by the express terms of the contract.

(5) It may not be for every trifling breach, or every breach, that a party can withhold performance of part of the contract."

Under reference to the fourth of these propositions, counsel for the appellants accepted that parties to a contract could, as an aspect of freedom of contract, if they chose, contract out of the effects of the mutuality principle. In respect of the present situation, nothing, however, had been said, done or written by the parties amounting to such a "contracting out".

[10] In the case of Miles v Wakefield MDC [1987] 1 AC 539 the issue before the House of Lords was whether or not the employer of striking officials was entitled to withhold payment to them in respect of the time when the officials did not carry out their duties. In the course of his speech, Lord Oliver referred to the, at that time unreported, decision of Lord Cowie in the case of Laurie v British Steel Corporation, subsequently reported at 1988 SLT 17. Lord Oliver described this case (at page 570 G to H) as

"a good example of the practical interdependence of the employees' willingness to perform on the one hand and the employers' obligation to pay wages on the other. The interdependence of the obligations on both sides is aptly summarised in the following extract from the opinion of Lord Cowie in the Outer House of the Court of Session:

'Counsel (for the pursuers) pointed out that no rescission of the pursuers' contracts of employment had taken place, and so the defenders were not entitled to refuse to fulfil their obligations. For the defenders it was argued that they were not seeking a remedy against the pursuers for breach of contract. Their position was, that these being contracts of employment they gave rise to mutual obligations and if one party failed to fulfil his obligations, he could not call on the other party to fulfil his. That was all that had happened here. The defenders maintained that the pursuers had failed to fulfil their obligation to work during a specific period; this was a breach of their contracts of employment and so they could not call on the defenders to fulfil their obligations to pay their salaries during the relevant period'."

Lord Oliver then remarked as follows:

"After referring to Turnbull v McLean & Co. [1874] 1 R 730 and Alexander Graham & Co v United Turkey Red Co Limited 1922 SC 533, Lord Cowie continued:

'The feature of all these cases referred to in Graham was, of course, that the contracts had, in each case, terminated, whereas in the present case the contracts of employment continued and the defenders simply refused to fulfil their obligation to pay the pursuers' salaries during a specific period of the currency of the contracts. In spite of this apparent specialty, however, I do not see why the general principle should not still apply. That general principle embodies the fundamental rule that if one party does not fulfil his part of the mutual contract he cannot turn round and demand performance by the other of his part of the contract. ... It seems to me that assuming that the pursuers were in material breach of their contracts in June 1976, there were certain remedies open to the defenders, and they could have exercised them if they so desired. It does not follow, however, that because the defenders did not exercise their remedies, the pursuers have the right to demand performance of the defenders' part of the contract when they have not carried out their own part. In principle it does not seem to me to matter that the defenders have not taken the formal step of rescinding the contract. If the pursuers have not carried out their obligations, they cannot sue for performance by the defenders of their obligations. No reference is made in any of the cases to the necessity of rescinding the contract, before putting forward the defence that the other party cannot sue for performance because he has not fulfilled his own obligations. In my opinion it is not necessary to do so, and in these circumstances, if the defenders can establish a material breach of contract by the pursuers in June 1976, the latter would have no right of action to enforce payment by the defenders of their salaries or indeed to obtain the declarator sought.'"

Lord Oliver then noted that:

"The 'general principle' referred to was stated thus in Turnbull v McLean & Co., 1 R 730, 738:

'With us ... all the conditions of a mutual contract are dependent on their counterparts, as a general rule, when they are of the substance of or material to the subject matter of the contract itself.'

The same approach appears from the opinion of Lord Salvesen in Alexander Graham & Co v United Turkey Red Co Limited 1922 SC 533, 546. There was, it appears, nothing particularly novel in this so far as the law of Scotland is concerned. The same principle appears as long ago as 1861 in Johnston v Robertson (1863) 23 D 646. Lord Justice Clerk Inglis observed, at p656:

'in a mutual contract, where one party seeks performance of the stipulations in his favour, he must show that he has given or tendered performance of his part of the contract. Every action on a mutual contract implies that the pursuer either has performed, or is willing to perform, his part of the contract; and it is, therefore, always open to the defender to say that under the contract a right arises also to him to demand performance of the contract before the pursuer can insist in his action'."

Lord Oliver went on to state: "The same principle has been applied in England" and he referred to Henthorn v Central Electricity Generating Board [1980] IRLR 361.

Lord Templeman in the Miles case also made reference to Lord Cowie's decision in Laurie, with apparent approval, and the other three members of the House of Lords in Miles concurred with both Lord Oliver and Lord Templeman. This was high authority, it was contended for the appellants, in support of the appellants' argument that a fundamental or material breach by one party to a contract disentitled him from suing on the contract, far less for making the kind of election that the respondent in the present case sought to make under clause FIFTEEN(e).

[11] The case of Hurst v Bryk & Others [2002] 1 AC 185 was cited. The question addressed in that case, by the House of Lords, related to a situation where a partnership agreement was prematurely dissolved without the consent of one of the partners. The partner in question elected to treat the other partners' conduct as amounting to a repudiatory breach of the partnership deed and he accepted the repudiation. The issue was whether, as a result, he was discharged from his obligations under the partnership agreement or whether he was obliged to contribute towards partnership liabilities. In the one substantive speech, given by Lord Millett, with which the other members of the House of Lords agreed, Lord Millett after setting out, at page 197, the terms of Section 44 of the Partnership Act, and the rules contained therein which govern the final settlement of partnership accounts, continued as follows:

"The application of the section may be varied by agreement, but it is quite general in its terms. It applies to the winding up of every partnership after a dissolution whatever the ground of dissolution and regardless of the conduct of the parties. It applies where the partnership is ordered to be dissolved under section 35(d) of the Act in the same manner as it applies in any other case, and no distinction is drawn between the rights and obligations of the partner or partners whose wrongful conduct led to the dissolution and the other partners or partner who are innocent of any wrongdoing. It would lead to an impossible situation if section 44 applied where the partnership was dissolved by the court under section 35(d) but not where the partnership was automatically dissolved following a repudiatory breach of the partnership agreement.

It would, in any event, be wrong in principle to have regard to the parties' conduct when taking the dissolution account. This is clearly the case where the account is taken in order to determine their respective entitlements to the surplus assets. These are in the nature of rights of property, and no matter how badly a partner may have behaved towards the partners he is not to be deprived of his accrued property rights." (Emphasis added)

This dictum, it was submitted on behalf of the appellants, pointed up the fact that in the present case a distinction fell to be drawn between the respondent's entitlement to what, if anything, appeared on his capital account, on the one hand, and on the other hand what rights, if any, he had to enforce a purely personal contract right arising after his withdrawal from the partnership, in circumstances as obtained in the present case and where the contractual right continued in the future for a number of years. In respect of the present kind of situation, the effects of the respondent's breach of the duty of good faith came home to him to prevent him from pursuing enforcement of that right. In Lindley and Banks; Partnership, 16^th edition, para 16-01 the following statement of principle is to be found:

"Perhaps the most fundamental obligation which the law imposes on a partner is the duty to display complete good faith towards his co-partners in all partnership dealings and transactions. Lord Lindley summarised that duty in the following terms:

'The utmost good faith is due from every member of a partnership towards every other member; and if any dispute arise between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour.'"

There had been, it was submitted, an extremely serious breach of that obligation by the respondent in the present case. Any right to a pension was clearly, it was submitted, dependant on the fulfilment of that obligation. Reference was made to Macari v Celtic Football and Athletic Company Limited 1999 SC 655 where Lord Marnoch, at page 655 B to E had opined that, in the context of the employer/employee contract, the implied obligation of trust and confidence to be found in that relationship fell to be seen as striking at the very root of the contractual relationship between the parties and that all the other obligations in the contract could be seen as the counterpart of that obligation. Standing these statements of principle, it was submitted that clause TWELVE of the partnership agreement in the present case simply did not have the effect contended for by the respondent. Clause TWELVE was simply concerned with the parties expressly providing for the expulsion of one of their number on any of the listed specified events, and for the purpose of providing for the settlement of accounts thereafter the expelled partner was deemed to have retired with effect from a date fixed by the other parties. "Deemed" retirement for the purposes of clause TWELVE was, however, different from real retirement in terms of clause THIRTEEN and FIFTEEN. Clause FIFTEEN(e) fell to be interpreted in the context of the agreement as a whole and its construction was not driven by the provisions of clause TWELVE. In particular clause TWELVE did not have the effect of excluding the principle of mutuality of contract and the rules concerning breach of contract. Reference, in this connection, was made to the case of Hoult & Another v Turpie 2004 SLT 308. For all the foregoing reasons the appellants invited the court to allow the appeal and to dismiss the action.

The Respondent's Submissions

[12] The respondent has a cross appeal which is in the following terms:

"The learned sheriff principal in correctly rejecting the defence of retention erred in his interlocutor of 28th February 2008 (on page 48 of the Appeal Print) in not repelling the Defenders' fourth and, in so far as founded on retention, the Defenders' fifth pleas‑in‑law."

The appellants' fifth plea-in-law is in the following terms

"Esto. (which is denied) the pursuer is otherwise entitled to payment of a pension in the circumstances, having regard to the terms of the Partnership Agreement, the pursuer's breach of contract, fraud and breach of fiduciary duty having caused the defenders' loss and damage in excess of such sums (if any) as may be due to the pursuer, the defenders are entitled to retain and set off against that loss and damage any sums which would otherwise be due by them to the pursuer, and the defenders should be assoilzied."

In opening his submissions counsel for the respondent invited the court to refuse the appeal and to allow the cross appeal by repelling the appellants' fourth plea-in-law and their fifth plea, "in so far as relying on retention." There were, it was submitted, three propositions in law which fell to be applied in the present case and upon which the respondent's position in this case depended. These were as follows:

1. The defence being put forward by the appellants, it was contended, was one of retention of payments in a situation where the only remedy available for the appellants was rescission of contract and/or damages.

2. The right to retain performance only arises where there is a continuing non‑performance of a reciprocal obligation.

3. While contractual obligations were presumed to be reciprocal that was only a presumption which could be rebutted by what the parties, on a proper construction of their agreement, had in fact agreed.

Counsel for the respondent accepted that there was an obligation of the utmost good faith arising from the relationship or partnership which permeated the whole of that relationship. But, he contented, the terms of clause TWELVE in the present case, fell to be read as excluding reliance by the appellants' on the breach of that fundamental obligation when the respondent sued for payment in terms of clause FIFTEEN(e). Counsel, furthermore, accepted that, in the present case, the appellants never, in fact, activated clause TWELVE. The respondent pre-empted them from doing so by voluntarily resigning. This, it was said, he did, in terms of clause THIRTEEN, though, it was accepted, on his behalf, that he had failed to give 6 months notice as provided for in that clause. The appellants were barred, it was said, from taking any point on the lack of notice. For the respondent to succeed, it was accepted that the court would require to hold that clause THIRTEEN had been operated. That being so, the wording of clause TWELVE disclosed a clear intention by the parties to the agreement to the effect that the appellants would be liable to make payments under clause FIFTEEN(e), even if the respondent had been guilty of a breach of his obligation (not being of a trivial nature) of utmost good faith to his fellow partners. The factual position was that there had been no settlement of dissolution accounts between the parties. There was nothing, in the terms of clause FIFTEEN, read as a whole, to suggest that there was to be any distinction to be drawn between a partner who retired because of a breach of his duty of utmost good faith, and a partner who had not been so guilty.

[13] The submissions of counsel for the respondent did not appear to seek to support the approach of the Sheriff Principal which equiparated the reclaimer's right to what might appear on his capital account and the right to pension under clause FIFTEEN.

[14] Reverting to support the first and second of his legal propositions, as noted above, counsel for the respondent referred to various authorities dealing with the application of the law in relation to retention. These were Bank of East Asia Limited v Scottish Enterprise 1997 SLT 1213, A v B 2003 SLT 242 (at 250B), Pacitti v Manganiello 1995 S.C.L.R. 557, B K Tooling BPK v Scope Precision Engineering (EDMS) BPK 1979 (1) SA 391 (A) and Hoult & Another cited supra. From these, it was submitted it was clear that the appellants' averments were irrelevant since they were seeking to retain performance of their obligations in a situation where the contract itself was not continuing and was at an end. So, for example, in Macari at page 650 Lord Caplan had said:

"The retention of performance must be directed at a failure on the part of the other party to perform a counterpart obligation. Moreover for retention to be available there must be a continuing failure to perform the counterpart obligation. No retention arises in respect of a past breach of contract by the other party."

On the basis of that dictum and the other dicta drawn from the cases referred to, it was submitted that the appellants' only redress, once the agreement was terminated was to sue for loss and damage, if any, and that they could not rely on the principle of mutuality of contract to avoid performance of their own obligation to pay under clause FIFTEEN(e).

Decision

[15] I shall deal, in the first place, with the respondent's defence based on what was contended to be the correct application of the principle of mutuality of contract. As has been seen it was argued that the concept of mutuality of contract could not be relied upon by the victim of a material breach of contract to defend any claim by the contract breaker for performance of rights arising from that contract, once the contract had come to an end and that any right to withhold performance by the innocent party only continued as long as the contract continued to exist. In support of this submission what was cited, as has been seen, were dicta from decisions in cases concerned with the application of the law in relation to retention which, by definition, are cases where there is a continuing contractual relationship between the parties, typically in modern times, building and civil engineering contracts and leases. It seemed clear to me that counsel for the respondent was labouring under a fundamental mistake of classification in that he equiparated retention with all the consequences of the application of the principle of mutuality of contract as opposed to seeing it for what it is, namely, an important example of how the principle of mutuality of contract applies in a continuing contractual relationship. Any brief reference to high authority on the general principles of the law of contract in Scotland should, in my opinion, have demonstrated how ill-founded the position adopted on behalf of the respondent was in this respect. A first port of call might have been Gloag on Contract, 2^nd Edition. Gloag's treatment of the principle of mutuality of contractual obligation is contained in chapter XXIII. The opening paragraph of that chapter is in the following terms:

"It is a general, though by no mean universal, principle in the construction of mutual contracts, that as the obligations on the one side are the counterparts of the obligations on the other, the undertakings by each party are really conditional; each binds themselves to do his part provided that the other party does his; neither is absolutely bound to fulfil his obligations irrespective of whether the rights he has contracted for are implemented or not. The application of this rule (which for convenience may be called the principle of mutuality) and the qualifications and exceptions to it, may be considered in reference to two general concepts. The one is, that a party to a mutual contract cannot demand fulfilment of the obligations in which he is a creditor, unless he has performed, or is prepared to perform, the obligation which he is himself undertaking, and in which he is a debtor. The other, briefly stated, is that if it appear that the intention of the parties was to constitute a mutual contract, and not merely a series of independent obligations, both parties must be bound or, neither".

Nothing in that chapter deals with the topic of retention. Retention is dealt with by the learned writer in chapter XXXV which is headed "Retention and Compensation". In that chapter Professor Gloag proceeds to describe certain features of retention at page 623 in the following way:

"It would appear to be established that a failure in the performance of a contract may not be so material as to justify the rescission of the contract, yet may be sufficiently material to entitle the other party to withhold counter performance...The right of one party to withhold performance of the obligations he is undertaking under a contract until performance of the obligations in which he is creditor is given is usually termed a right of retention."

The fundamental fallacy in the respondent's submissions on this topic, in this case, was to equiparate the general principle of mutuality of contract with retention. As authorities such as British Motor Board Co Limited v Thomas Shaw (Dundee) Limited 1914 SC922 at page 926 per Lord President Strathclyde, Bank of East Asia Limited v Scottish Enterprise cited supra at page 1216 per Lord Jauncey, Macari v Celtic Football and Athletic Company Limited cited supra at page 639 E to F to 640 A to B per Lord President Rodger, demonstrate, the scope of the general principle is not restricted to its application in respect of the right of retention. The general principle is clearly stated in Erskine's Institute IV iii. 86 in the following terms:

"No party in a mutual contract, where the obligations on the parties are the causes of one another, can demand performance from the other, if he himself either cannot or will not perform the counterpart, for the mutual obligations are considered as conditional."

That principle has a vigour going beyond its application in relation to retention and, in particular, may be used by a party to a contract which has been broken materially by the other party to resist any claim for performance of any obligation on his part under the contract, even when the contract has been terminated. This is made clear by McBryde, cited supra, at page 558, footnote 162 where he states:

"...it should be noted that mutuality as an argument does not arise only when a contract is being performed. Many of the classic cases in Scots law dealt with contracts which had been terminated, including Turnbull v McLean & Co and Graham & Co v United Turkey Red Co Ltd."

The point was specifically addressed by Lord Cowie in the Laurie case cited supra at page 19B where he made it clear in his opinion that no distinction fell to be drawn as between a continuing contract and a terminated contract for the purposes of the operation of the principle of mutuality. That, in my judgement, was, and remains, a sound statement of our law. It reflects apparently a similar approach in the existing law of England see Chitty, Contract 30^th Edition at para 24-039. It puts paid to the argument for the respondent on this aspect of the case for although the appellants do, in part, in their plea-in-law 5, appear to rely on the law of retention, the pleas which they relied upon before this court were pleas-in-law 3 and 4 which are to the effect that the pursuer being in material breach of his agreement is not entitled to sue upon it. I should make it clear, at this stage, that I agree entirely with Lord Drummond Young in the Hoult case that there is a presumption that the whole of the obligations on one side of the contract are the counterparts of the obligations on the other side. I am of the opinion, furthermore, that that presumption has not been rebutted in the present case and that the obligations of the appellants under the contract were interdependent with, and conditional upon, the respondent's obligations of utmost good faith.

[16] I turn now to deal with the remaining argument advanced on behalf of the respondent which was to the effect that the terms of clause TWELVE revealed a clear intention on the parties to the partnership agreement to displace the operation of the doctrine of mutuality of obligation when it came to questions of enforcement of clause FIFTEEN(e) of that agreement. It has, in this connection, to be recalled that it was accepted, on behalf of the respondent, that clause TWELVE was never operated in this case. The respondent, therefore, never acquired the status of a deemed "retiree" by virtue of clause TWELVE. Putting aside the fact had he did not give the required notice under THIRTEEN, the respondent would then fall, it seems, to be regarded as having voluntarily resigned from the practice no doubt in recognition of the fact that his conduct required that. It may well be, following the approach of the House of Lords in the case of Hurst cited supra that, in that situation, he is at least entitled to what if anything is revealed as belonging to him on his capital account but in my opinion, and contrary to the approach of the Sheriff Principal (which as has been seen was not supported by counsel for the respondent,) a distinction falls to be drawn between any such right on the one hand and personal contract rights arising from clause FIFTEEN on the other. In that respect I am of the clear opinion that the provisions contained in clause TWELVE have no bearing on the question as to whether or not the appellants may rely on the principle of mutuality of contract to resist now a claim from the respondent for payment in terms of clause FIFTEEN(e). Not surprisingly and as noted, it was conceded on his behalf that he had been in material breach of an obligation going to the very heart of the contract of partnership. The importance of that obligation can hardly be overstated in the circumstances of such a relationship and under reference to what was said in Lindley & Banks on Partnership cited supra. The nature and extent of the respondent's conduct was an extraordinarily serious breach of that obligation. For the respondent to avoid the consequences of such conduct, which the law would otherwise apply, would require, in my opinion, very clear wording, indeed, in the partnership agreement. To have that .effect would require wording which made it clear that the other partners were abandoning their right to refuse to perform their obligations in the partnership agreement when faced with a material breach of contract striking at the very heart of the agreement between the parties. In my opinion no such wording appears in the partnership agreement. Such a result should not be read into the contract as some kind of side-wind from a specific provision dealing with a specific matter. Clause TWELVE in my opinion, was simply setting out an agreement by the parties to provide for an automatic and immediate contractual right in the partners to expel one of their number, in the events specified, and to deal with the consequences of such events, with the regard to the timing of the termination of the partnership with him, no doubt this being of importance, for example, with regard to settlement of accounts. It has, therefore, in my view, a procedural nature to it rather than dealing with substantive rights arising. On any view of matters, in my opinion, it would be stretching the wording of that provision to suggest that its effect is wholly to subvert the effect of the principle of mutuality of obligations in the present situation which would otherwise arise as a matter of law. To have that effect would have required, in my opinion, for example, an express, provision in clause FIFTEEN(e) to the effect that payment of a pension to the first party fell to be made notwithstanding any material breach of contract such as those specified in the enumerated examples in clause TWELVE had occurred. There is no such provision or its equivalent.

[17] Lastly I should add that the approach to the construction of the relevant provisions which I favour to my mind is consonant with what one might consider the parties to such a contract would have reasonably intended when they entered into their contract of partnership and produces a commercially sensible construction, compare Mannal Investment Company Limited v Legal Star Life Ansurance Co Limited [1997] AC 749 at page 771.

[18] While the matter was never fully developed and argued before this court, the question was raised as to whether the respondent had averred facts and circumstances which, if established, would entitle him to maintain that the appellants had excused his material breach of contract, or that they are, in some way, personally barred from relying on it as a defence to an action by him based upon the contract. The first thing to note in that regard is that the pleadings in this case might be said to present a less than clear picture as to how, in a legal sense, the contractual relationship between the parties actually came to an end. The present action was raised in November 2000. It was sisted between that time and 22 March 2005. The respondent was not found guilty of the crimes in question until 3 December 2004. The period of sist, it may be reasonably be surmised, was required to enable the respondent's position in the criminal proceedings to be finally determined. The respondent had long since, however, withdrawn from the partnership. As a matter of pleading, the parties' respective positions on this point are as follows:

In article 2 of condescendence the respondent avers inter alia, "By letter dated 24 March 2000 the pursuer retired from the Partnership". The terms of the letter are not incorporated by the respondent into his pleadings and it does not appear to be among the papers before this court. The appellants, in response, in answer 2, aver inter alia

"Admitted that the pursuer ceased to be a partner in the Firm on 24th March 2000... The Partnership Agreement and the pursuer's letter on 24th March 2000 are referred for their terms beyond which no admission is made...Explained and averred that the pursuer left the Firm following the discovery that he had fraudulently dealt with a substantial sum of clients' funds. The pursuer admitted that he had so acted and made repayment of a sum which he claimed represented the amount which he had taken from the Firm's clients. He left the Firm and made over the whole assets of the Firm to the defenders. Reference is made to the said letter of resignation. Further investigations by Accountants engaged by the (individual) defenders revealed further fraudulent activity on the part of the pursuer spanning several years... These investigations are being conducted by Accountants instructed by the defenders and by the Dumfries and Galloway Police. The investigations will take many months to complete".

In article 3 of condescendence the respondent avers in "Around 21st June 2000, the defenders exercised their option to acquire the pursuer's interest in the firm, in terms of Clause 15(c) of the Partnership Agreement. Hitherto, they intimated their intention to continue the firm's business and practice which they duly did". In answer 3 the appellants aver, inter alia, "The (individual) defenders did not elect to take over the assets (and liabilities) of the Firm. The pursuer made them over to them, without claim or reservation when his fraud was discovered". There is, therefore, a conflict of fact in the pleadings as to whether or not the appellants elected to take over the respondent's interest in the Firm in an exercise of their option in terms of clause FIFTEEN(c) of the Partnership Agreement, on 21 June 2000, almost five months before the raising of the present proceedings. The question that has arisen is as to what effect, if any, that has with regard to the proper disposal of the matters argued before this court. I take as the starting point in answering that question, that the respondent was in material breach of his contract with the appellants, at the time of the raising of his proceedings (which breaches were incapable of being remedied by him) and the general principle, as discussed above, that a person in material breach of his obligations cannot sue for performance by the innocent party to the contract of his obligations. If it could be established that the appellants did exercise their option in terms of clause FIFTEEN(c) in the light of the respondent's conduct and the terms of his letter to them of 24 March 2000 (whatever they may have been) may they thereby be deprived of a defence to the action based on clause FIFTEEN(e) once it was raised? I am unable to reach such a conclusion, at least, in the absence of specific averments by the respondent which might instruct a relevant case of personal bar and/or wavier. It is, in this connection, in my opinion, important to recall that, as Lord Cowie made clear in the Laurie case, an innocent party to a contract, faced with a material breach of contract by the other side, need not take any formal steps of rescinding the contract for the principle to apply that the contract breaker cannot sue for performance by the innocent party. As his Lordship concisely put matters "No reference is made in any of the cases to the necessity of rescinding the contract, before putting forward the defence that the other party cannot sue for performance because he has not fulfilled his own obligations. In my opinion it is not necessary to do so...". In his Work on Contract, cited above, McBryde at para 20-106 states

"It is, however, only in some situations that a reaction to the other's breach is necessary. It may be that the innocent party never need rescind. That party remains inactive and, if sued, has a good defence to the action. Rescission is not an inevitable consequence of a decision to found on a material breach".

The point is further driven home by McBryde at para 20-108 where it is stated

"A material breach by one party gives the other party the option to be free from further performance of obligations. There need not be any prior warning to the 'guilty' party, for it is that party's failure to fulfil which has the effect of giving the innocent party the right to be free from future performance. The innocent party may not be due to pay sums under the contract after the material breach (nor from after the date of rescission if any)".

I regard that as sound statement of principle based on authority.

- see e.g. Graham & Co v United Turkey Red Co Limited cited supra.

[19] If it be the case that the appellants did exercise their option under clause FIFTEEN(c) that was, ex-hypothesi, the exercise of a right which fell to be exerciseable in the case of determination of the respondent's contractual relationship with them. Simply by doing so, they cannot, in my opinion, be held to excuse the respondent's material breach of contract the full extent of which, apparently was not discovered until much later), nor can they be held, in the absence of further averments to have, in some way, represented that he would be entitled to receive payments in terms of clause FIFTEEN(c), notwithstanding his gross breach of contract with them. An exercise by them of the clause FIFTEEN(c) option was not an exercise by them of affirming the continuance of the contract, leaving the respondent with a right to sue upon it in the future on the basis of FIFTEEN(e). Accordingly, in my opinion whichever of the versions of events pled (if either), with regard to how the partnership agreement came to an end is correct, in neither case does it amount to an affirmation by either side of its continuance. For these reasons it does not appear to me that the unresolved question on the pleadings, prevents the appellants maintaining as they do, that standing the material breach of contract by the respondent, they are entitled to point to that breach of contract as providing them with a shield against any claim brought by the respondent under clause FIFTEEN(e), after the parties' contract had clearly come to an end.

[20] As previously noted the appellants, through their counsel, accepted, under reference to the House of Lords decision in Hurst that there was nothing to prevent the respondent from recovering his rights of property (including any share of relevant profits) if any such existed. The proposition which was set out in the House of Lords in the case of Hurst, in my opinion it is supported by what is said in Gloag at page 261 namely "The principle that failure by one party in a material obligation justifies the other treating a contract as repudiated is limited to the rescission of those terms of the contract which are still executory. It does not extend to rescission of real rights in property which the party in default has acquired under the contract". If therefore the appellants have exercised their option in terms of clause FIFTEEN(c) and may, accordingly, be due to pay the respondent something in terms of his rights of property in the partnership he would still be entitled to pursue any such claim. He does not, as noted, of course, aver that he would have been due anything as a result of the FIFTEEN(c) option being exercised. That may itself be significant. When however we come to clause FIFTEEN(e) that is a clause, as previously noted, which is cast entirely in the respondent's favour. By it he may elect to obtain a pension rather than what is due to him on his partnership account. His material breach of contract has deprived him of that right of election. It does not, however, deprive him, following Hurst and the passage cited from Gloag, from seeking to recover his share of goodwill and work in progress or any other remedy under partnership law. Approaching matters that way, he has, by his material breach of contract, lost his right of election. The fact, if it be a fact, that the appellants sought to invoke clause FIFTEEN(c) would not amount to a wavier by them of their right so to contend but neither does it preclude the respondent pursuing in another process, his "real rights in property... which (he) has acquired under the contact" Gloag supra. I am at a loss to see how it could be argued that the appellants can be said to have affirmed his right to elect because they may have exercised the FIFTEEN(c) option to which he apparently did not demur. The provisions of clause FIFTEEN, taken as a whole, are designed to deal with the termination of the partnership agreement but to allow the partnership itself to continue. Clauses in contracts which deal with a breach of contract, or which come to operate when performance is impossible or has been given up, may still be invoked even after a material breach means that "the innocent party" cannot be compelled to perform further - see McBryde The Law of Contact para 20-120.

[21] For these reasons it does not appear to me that the unresolved question in the pleadings, which I have just been addressing, prevents the appellants maintaining, as they do, that standing the admitted material breach of contract by the respondent, they are entitled to point to that breach of contract as providing them with a shield against any claim brought by the respondent under clause FIFTEEN(e), after the parties' relationship had, otherwise, clearly come to an end.

[22] In the whole circumstances, and for the foregoing reasons, I am of the opinion that the decision of the sheriff at first instance was sound and that the appeal should be allowed. It follows from the approach I have taken to the action that the cross appeal, in my opinion, falls to be refused.

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Clarke Lady Dorrian Lord Marnoch	[2010] CSIH 38 OPINION OF LADY DORRIAN in Appeal by the Defenders and Cross Appeal by the Pursuer in the commercial action JOHN KENNEDY FORSTER Pursuer and Respondent; against MESSRS FERGUSON & FORSTER, MACFIE & ALEXANDER AND OTHERS Defenders and Appellants: _______

Pursuer & Respondent: Bartos; Burness, WS

Defenders & Appellants: Dunlop; Drummond Miller LLP (for Charles Hennessy & Co, Glasgow)

30 April 2010

[23] I agree with your Lordship in the chair that for the reasons which you have given the appeal should succeed. I also agree that the cross-appeal should be refused.

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Clarke Lady Dorrian Lord Marnoch	[2010] CSIH 38 OPINION OF LORD MARNOCH in Appeal by the Defenders and Cross Appeal by the Pursuer in the commercial action JOHN KENNEDY FORSTER Pursuer and Respondent; against MESSRS FERGUSON & FORSTER, MACFIE & ALEXANDER AND OTHERS Defenders and Appellants: _______

Pursuer & Respondent: Bartos; Burness, WS

Defenders & Appellants: Dunlop; Drummond Miller LLP (for Charles Hennessy & Co, Glasgow)

30 April 2010

[24] I regret, unlike your Ladyship, that I find myself unable to agree with your Lordship in the chair in regard to the matters raised in this appeal and cross-appeal. Certain of these matters are very far reaching and it is unfortunate that they arise in the context of pleadings which, as your Lordship has indicated, are far from satisfactory.

[25] Your Lordship has set out most of the terms of the Partnership Agreement with which we are concerned but for the sake of completeness I would like to add a reference to Clause 13(a) and (b) which are in the following terms:

"THIRTEEN (a) any Partner may retire on giving not less than six months' notice in writing to the other partners to expire on 30^th April in any year, or such other notice as may be agreed among the Partners;

(b) if any Partner shall be incapacitated from attending to the partnership business by reason of persistent ill health or having become a patient within the meaning of the Mental Health Act 1959 or any statutory modification amendment or re-enactment thereof for the time being in force or otherwise becomes incapable of managing his personal affairs or ceases to hold a current Practising Certificate from the Law Society of Scotland and the other Partners shall give to him not less than two months notice in writing of their intention to determine the Partnership as to that Partner then at the expiration of such notice the said Partner shall be deemed to have retired from the partnership unless before the expiration of such notice he shall have resumed his Partnership duties to the reasonable satisfaction of the other partners."

[26] At this stage I would emphasise that we are being asked to resolve some important legal issues on, to say the least, a somewhat hypothetical basis. I say that because counsel for the defenders made clear that his position at any Proof would be that the pursuer had simply resigned from the partnership with the result that its consequent dissolution should be governed by the Partnership Act 1890 and not by Clause 15 of the partnership deed. It was only if the pursuer succeeded in his contention that he had retired under Clause 13 that, because of his breach of good faith, the principle of mutuality was said to debar his claim for a pension under Clause 15(e). That, I may say, in turn reflects a generous view of the pursuer's pleadings wherein all that is actually averred is that the defenders elected to acquire the interest of the pursuer under Clause 15(c) of the partnership deed. This, it was said, if proved, would demonstrate that the defenders had accepted that the pursuer had "retired" under Clause 13 despite the absence of any notice given by the pursuer under that Clause. As importantly, and differing apparently from your Lordship on this point, it seems to me that that same averment underlines the fact that the case on which the pursuer and respondent seeks to go to proof is one involving an affirmation of the contract on the part of the defenders and appellants rather than, as might well have happened, one involving a rescission by them of the whole contractual relationship. Whatever be the position in equity, this, in my opinion, is of importance when it comes to a consideration of the relevant law. At the same time, I am very conscious that the pleadings, as I have described them, involve unspoken aspects of personal bar or waiver (about which there are no pleas-in-law) and it is perhaps unfortunate that the attack on relevancy was not more broadly based. Against that background it is with some reluctance that I embark, firstly, on a consideration of the fundamental doctrine of mutuality. Nonetheless that is the task which has been set by counsel for the appellants, his contention being that what did or did not happen when the respondent left the partnership is of no consequence since the respondent's right to a pension was contained in a provision which was on any view a counterpart of the implied obligation of good faith and is thus unenforceable.

[27] Counsel's argument in this respect was based on the general proposition that "a failure to perform any material or substantial part of the contract on the part of one will prevent him suing the other for performance" - per Lord Justice Clerk Moncrieff in Turnbull v McLean & Co 1874 1 R 730 at p. 738. However, as I see it, the principle embodied in that proposition is essentially to do with the way contracts operate and, in particular, with when they can or cannot be enforced. It is not a principle to be used as an aid to the construction of what parties have agreed and, far less, as a means of implying terms into a contract. At the outset, therefore, I respectfully take issue with counsel for the defenders when he submits that the question arising is whether the parties have by clear express provisions "rebutted" some supposed meaning of the contractual provisions derived from the principle of "mutuality". My own remarks in Macari v Celtic Football and Athletic Company Limited 1999 SC 628 at p. 655 regarding the duty to maintain trust and confidence going to the root of a contract were made in the context of what I conceived to be the overall unity of the contract there under consideration and likewise, in the present case, I see no reason a priori to regard the complicated provisions of a contract of co-partnery as being other than wholly interdependent and conditional upon each other. In such a contract there are no separate "stages", as in Bank of East Asia Limited v Scottish Enterprise 1997 SLT 1213 and in certain of the authorities founded on by Lord Jauncey in that case; nor is there what Professor Gloag describes (at p. 594 of his work on Contract, 2^nd ed) as a "congeries of contracts" independent of each other. In the absence, therefore, of some form of structural divisibility it, in my opinion, simply will not do to apply some but not all of the contractual provisions. In particular, there is, as I see it, no justification for "cherry-picking" a certain provision as being the supposed counterpart or one of the supposed counterparts of a breach of good faith and disapplying it but not others under the guise of "mutuality". To adopt such an approach is, in effect, to undermine the principle of unity and indeed contradicts the initial presumption of mutuality which is the interdependence of all material contractual provisions.

[28] In so expressing myself I have yet again considered closely what was said by Lord President Rodger (as he then was) in Macari at p. 641. Needless to say, anything said by Lord Rodger is entitled to the greatest respect and it is true that, unlike myself, he appears to have thought that the reasoning of the Judicial Committee in Bank of East Asia Limited could in some way be applied to a contract of employment where there was a breach of the duty to maintain trust and confidence. In doing so, and in reliance particularly on certain dicta of Lord McLaren, he puts great emphasis on the intention of the parties regarding reciprocity as derived from the terms of the contract and the surrounding circumstances. I agree, of course, that the intention of parties must always be a paramount consideration but when the suggestion is that they have impliedly intended mutuality to operate within "parts" rather than the whole of the contract I continue to think that these separate "parts" (Lord Rodger's word at p. 640) must in some way be capable of identification in terms of either chronology or separate and distinct collateral provisions. In the event, Lord Rodger, in Macari, decided that on no view could the pursuer's failings be excused by reference to the mutuality principle and so it was, I think, unnecessary for him to consider that matter in any great detail. Be that as it may, an exercise based on isolating "parts" of a contract is a very different exercise from the approach taken by counsel for the defenders, namely looking at one provision and deciding whether or not it, individually, can be regarded as a counterpart of another. The answer to that question may often be in the affirmative but it is an answer which, of itself, is valueless in that it entirely overlooks the presumed overall unity of the contract which, be it noted, is said in all other respects to be a continuing one; - until, that is, another provision is looked at and the same exercise repeated. In this way, anything other than the simplest contract could be endlessly broken down and, as it seems to me, the law reduced to uncertainty, impracticality and obscurity. There is, moreover, no suggestion of such a remedy in Professor Gloag's highly authoritative work. On the contrary, at p. 952 he enumerates the creditor's rights arising on breach of contract as being specific implement, damages, rescission and "withholding performance of the obligations which are incumbent on him until those in which he is creditor are performed or secured". The last two of these are then said to depend on the principle of unity of contract. I should add that the authorities referred to by your Lordship in the Chair which uphold the right of an employer to withhold wages during the period of a strike are, as I see it, simply examples of a complete withholding of performance pro tempore on both sides and, as such, a clear application of the principle of mutuality while at the same time respecting the unity of the contract.

[29] As to this matter generally, I may say that I am much fortified by the powerful opinion delivered by Lord Drummond Young in Hoult v Turpie 2004 SLT 308 in which I understand him to be expressing, albeit perhaps in more elegant language, the same views as those expressed above. Paras [5] to [19] inclusive of his opinion are entirely relevant to the present question but it will perhaps suffice to quote here the following passage from p. 312 of the Report:-

"[8] The submissions made by counsel on either side raise an important issue relating to the principle of mutuality of contractual obligations: the nature and significance of the requirement that, for the principle to operate, the obligations in question must be the counterparts of each other. The existence of such a requirement is clear; indeed, it is inherent in the very notion of mutuality. The dispute between the parties centres rather on the extent to which the individual obligations on one side of a contract are to be regarded as the counterparts of the individual obligations on the other.

[9] In considering that matter, it is I think important to have regard to the practical function that the principle of mutuality performs in regulating the rights and obligations of the parties to a contract. Its main practical significance relates to the defence of retention, or the right of one party to withhold performance of its obligations because of the other party's material breach of contract. This defence, which is usually referred to as the right of retention, functions as a form of security for the performance of the contract. Its practical importance is very clear; often it is by far the most useful remedy for ensuring that contractual obligations are properly performed, and that the victim of a breach of contract is protected against further loss. It is of particular importance in systems such as Scots law, where the concept of the equitable interest is unknown and quasi-proprietary rights cannot arise merely by virtue of a contract. For these reasons, I am of opinion that the principle of mutuality should not be interpreted in a way that substantially curtails the availability of the defence of retention. That applies in particular to the requirement that the obligations should be counterparts of each other; that requirement should not be used in an artificial manner which breaks up the essential unity of a contract.

[10] In Gloag on Contract (2^nd ed), at p 594, it is stated that 'it is clear that the presumption is that the obligations undertaken by one party are the counterpart and consideration for each other'. In other words, there is a presumption that the whole of the obligations on one side of a contract are the counterparts of the whole of the obligations on the other. Counsel for the pursuers argued that that was no longer the law, or that at least any such presumption was weaker today than in former times. In so submitting, he relied on the greater complexity of modern contracts, which frequently contain a much more diverse range of obligations than previously, and on the approach followed in Bank of East Asia v Scottish Enterprise, supra. In my opinion the law remains as stated by Gloag, for the following reasons. First, there is a sound, and indeed obvious, reason for such an approach. This is stated by Gloag as follows (at p. 595): 'It is clear that two contracts, having no connection with each other except that they are between the same parties and entered into at the same time, may be constituted or recorded in one document. In such a case there is no ground for holding that the right to exact performance of one contract is in any way or in any circumstances conditional on performance of the other. But there is a general presumption that the reason why the parties have not recorded their agreements in separate documents is that they intended them to be dependent on each other'.

That statement seems to represent common sense, and emphasises the wide scope that the principle of mutuality has generally been given in Scots law."

[30] Needless to say, I respectfully agree with all that is said in that passage and, indeed, in the remainder of the opinion. Your Lordship in the chair also expresses agreement with Lord Drummond Young to the effect, in the present case, "that the obligations of the appellants under the contract were interdependent with, and conditional upon, the respondent's obligation of utmost good faith". According to my understanding, however, acceptance of what I shall term the "interdependence principle" would mean that the obligation of utmost good faith should itself be viewed as only one of many inextricably linked obligations undertaken by the respondent, all of which are collectively the counterpart of all the obligations undertaken by the appellants. If that is so, it would seem to follow that the contract must stand or fall as a whole. Your Lordship also points out that in certain circumstances one party to a contract may invoke the material breach of the other as a "shield" against any claim for performance. Doubtless that is so although, if the situation is not one involving retention, I rather think that in terms of formal pleading such a stance would be almost indistinguishable from rescission. However that may be, I am clear in my own mind that acceptance of the "interdependence principle" means that any deployment of a shield is quite inconsistent with the attempted enforcement of other parts of the contract by the appellants. In this connection, I am afraid that, with all due respect, I cannot agree with your Lordship that Clause 15(c) can in some way be looked at separately or independently as conferring "a right which fell to be exerciseable in the case of determination of the respondent's contractual relationship". In my opinion it clearly relates back to previous clauses and confers contractual rights quite different from those which would arise on rescission or under the Partnership Act 1890. In any event, this was no part of the argument advanced by counsel for the appellants. On the contrary, he appeared to accept that any election under Clause 15(c) would demonstrate acceptance by his clients that the respondent had "retired" under Clause 13. His whole argument on this branch of the case was based on the "cherry-picking" approach which I have been at pains to discredit.

[31] So far, I have considered only whether there is any structural justification for applying the principle of mutuality other than throughout the entire contract of partnership. It will be clear that I answer that question in the negative and that, in my opinion, the defenders' proper remedy, if they wanted to avoid the provisions of Clause 15(e), and assuming there was no impediment to doing so, was to treat the whole contract as repudiated and to rescind it.

[32] There is, however, a further and just as important reason why this appeal must fail and that arises from the express provisions of the particular contract before us. In this connection, and unsurprisingly, it was common ground that the express agreement of parties will always take precedence over what might otherwise be implied. Turning, then, to the express provisions of the contract in question it seems clear that if the pursuer had retired in the normal way he would have been entitled to the pension which he claims. And if - I say only if - he was in some way allowed to retire under Clause 13 I should have thought, myself, that that was arguably an end of the matter. However, counsel for the pursuer did not go that far and instead relied on the provisions of Clause 12. I agree in any event that both clauses must be read together and, indeed, along with Clause 15. The provisions of Clause 12 have been set out by your Lordship in the chair and it would serve no purpose to repeat them here. Suffice to say that they list in some detail a number of situations, including a breach of "good faith between the partners", in which a partner can be expelled by the other partners with the rather surprising result that he should then be "deemed to have retired from the partnership".

[33] So what then happens? Either there is no provision in the Partnership Agreement as to what happens on deemed retiral or, as I think myself, the partner deemed to have retired falls to be regarded as a retired partner for the purposes of Clause 15. There was a suggestion during the debate before us that a partner deemed to have retired might fall within some of the provisions of Clause 15 (for example Clause 15c) but not others (for example Clause 15e). Apart, however, from what is arguably a pretty clear link between sub-clauses (c) and (e) this involves attaching different meanings to the same words, "death or retirement", within the same Clause of a written contract. In my opinion that is a most unlikely construction.

[34] In the result, I am myself driven to the conclusion that this is a case where the parties have expressly foreseen a possible breach of good faith and, improbably or otherwise, decided to equate its consequences with those of retirement. Whatever else, it seems to me that so long as the contract remains in force that express agreement must be respected. In that connection, however, if the defenders are correct in their contention that the pursuer simply walked away from the partnership it seems probable that, on that ground alone, they could have treated the contract as having been repudiated and thus rescinded it.

[35] As to the Cross-Appeal I confess to having had some difficulty in following the argument of counsel for the pursuer. I am, however, satisfied that the defenders' fourth and fifth pleas-in-law are not based to any extent on retention (as opposed to set-off) and on that short ground I would be for refusing it. At the same time, as Lord Drummond Young points out and as I think most of the cases show, the main practical application of the doctrine of mutuality is in relation to retention in the sense of with-holding performance in the course of a continuing contract; and, while your Lordship in the Chair has indicated that the concept of reciprocity can also be useful in testing the validity of a purported rescission or claim for damages, that is not the situation in the present case. In this connection, I am far from clear how the defenders' fourth plea-in-law is on any view a proper reflection of their position. It reads:

"4. The pursuer being in material breach of contract, and being thus disabled from relying on the provisions of the Partnership Agreement, in the circumstances condescended upon, the defenders should be assoilzied."

If the defenders' primary position is vindicated - namely that Clause 15 does not even arise for consideration - that plea is plainly inept. If, on the other hand, it is tabled on the esto basis that Clause 15 does arise for consideration, then I am in some doubt as to how, without further explanation, the defenders can maintain that the pursuer is disabled from relying on the provisions of the contract while at the same time affirming the contract by themselves invoking Clause 15(c). As is pointed out by Professor Gloag (at p. 407) another aspect of mutuality is that "both parties must be bound or neither" and it may be that this thinking lay behind certain of Mr Bartos' submissions. If so, this may, in a sense, take us back to the first argument on the Appeal as to which I repeat my view that if the defenders wanted to avoid the provisions of Clause 15(e) they should have rescinded the whole contract as being, in the circumstances, the only proper reflection of the doctrine of mutuality. Whether that is in substance what happened or whether the contract is still extant is, of concession, a matter for proof before answer.

[36] In the result, I would have been for refusing the Appeal and, while I concur in refusing the Cross Appeal, that is subject to the reservations expressed above.