Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 129
CA21/08	OPINION OF LORD HODGE in the cause PRIMARY HEALTHCARE CENTRES (BROADFORD) LIMITED Pursuer; against DR ALAN WILLIAM HUMPHREY Defender: DR PRABHULUNG RAVANGAVE First Third Party: DR SHEILA ANNE TURVILLE Second Third Party: ­­­­­­­­­­­­­­­­­________________

Pursuer: MacNeill QC; Shepherd & Wedderburn LLP

Defender: MacDonald, Solicitor Advocate; Bell & Scott (for Stronachs, Inverness)

First Third Party: D. Thomson; Brodies LLP

Second Third Party: Beynon; Balfour & Manson LLP

16 September 2010

[1] Primary Healthcare Centres (Broadford) Limited ("the landlords") leased a building in Broadford, Isle of Skye, known as the Broadford Medical Centre, to a partnership, which comprised Dr Humphrey, Dr Ravangave and Dr Turville. The lease came to an end on the dissolution of the partnership. The landlords initially raised an action against Dr Ravangave and Dr Turville seeking a declaration that they were jointly and severally liable for the tenants' obligations under the lease.

[2] Unfortunately, the dispute has become protracted. This is the second court action in relation to the dispute and the debate which I heard was the second substantive hearing in this action.

Background:

(i) The first action

[3] I set out the events underlying the proceedings and the procedural history of the first action in my first opinion in this action ([2009] CSOH 46). In summary, the landlords in the first action sued Dr Ravangave and Dr Turville on the basis, which Dr Humphrey then accepted, that the partnership had been dissolved in 2004, after Dr Humphrey had retired from the practice in March 2003 and after they, the landlords, had released him from liability under the lease. Dr Ravangave and Dr Turville disputed that account of events, asserting that the partnership had been dissolved in about October 2002. Dr Turville brought Dr Humphrey into the first action as a third party on the basis (i) that he was jointly and severally liable for the former partnership's obligations under the lease and (ii) that he was bound to indemnify her against any liability under the lease in terms of clause 6.4 of the partnership agreement. The parties agreed to conduct a restricted proof in relation to the landlords' claims against Dr Ravangave and Dr Turville, leaving for later determination Dr Turville's assertions against Dr Humphrey, which the landlords did not adopt. The problems which have emerged stem from that decision.

[4] The landlords went to proof against Dr Turville alone as Dr Ravangave intimated that he no longer opposed the conclusion that he was jointly and severally liable with her for the former partnership's obligations under the lease. Dr Humphrey gave evidence at the proof but did not otherwise take part in the proceedings. Lord Glennie heard the proof and in his opinion ([2008] CSOH 14) found that the partnership had come to an end on 30 September 2002. He held that the landlords were not entitled to found on evidence that the partnership ended in 2002 as that supported a factual case which they had denied. He observed that they had not sought to amend their pleadings and stated that, if they had, he would have been disinclined to allow the amendment. This was principally because the landlords' fall-back case would have been prejudicial to Dr Humphrey as it might have undermined the release which the landlords averred that they had given him. He held that Dr Turville was entitled to decree of absolvitor and put the case out by order. At the by order hearing counsel for the landlords sought to amend their pleadings by introducing a fall-back case that the partnership ended in September 2002 and that all three former partners were liable for the tenants' obligations from that date. Lord Glennie refused to allow the minute of amendment to be received and assoilzied Dr Ravangave and Dr Turville from the conclusions of the summons.

[5] The landlords enrolled a reclaiming motion. I was informed in the earlier hearing in this action that they had consulted senior counsel who had advised that there were no reasonable prospects of overturning Lord Glennie's discretionary decision to refuse to receive the minute of amendment and no reasonable prospect of success in the appeal without that amendment. The landlords then abandoned their reclaiming motion.

(ii) The prior history of this action
[6] The landlords then raised these proceedings against each of the former partners seeking declarator that they were jointly and severally liable for the tenant's obligations under the lease. They averred that the partnership had been dissolved in September 2002 and, contrary to their earlier averment, which had been mistaken, they had not released Dr Humphrey from his liability as a former partner.

[7] Each of the former partners defended the action. All parties accepted that the partnership ended on 30 September 2002 and also that the landlords did not grant Dr Humphrey's request to be released from his obligations under the lease. But Dr Ravangave and Dr Turville took a plea of res judicata which I sustained in my earlier opinion ([2009] CSOH 46) and I granted them decree of absolvitor. Thereafter the landlords amended their pleadings to remove their case against the absolved partners and to seek a declaration that Dr Humphrey was liable for all of the tenant's obligations in terms of the lease. Dr Humphrey brought his former partners back into the action as third parties on the basis that, if he were liable for 100% of the tenant's obligations, he would be entitled to pro rata relief from them.

Issues which arise in this debate

[8] Dr Humphrey advanced a battery of preliminary pleas in his defence. They entailed res judicata, waiver, personal bar, and an assertion that the release of his former partners discharged his liability under section 9 of the Mercantile Law Amendment Act (Scotland) 1856 ("the 1856 Act"). The third parties, as well as supporting certain of those defences, also submitted that Dr Humphrey no longer had any right of relief against them and Dr Ravangave challenged the relevancy of Dr Turville's claim to indemnity in terms of the partnership contract.

The submissions of the parties

[9] Mr MacDonald for Dr Humphrey submitted, first, that the landlords had waived their right to pursue him for liabilities arising under the lease. Their abandonment of their right came about either by their adopting the position in their pleadings in the first action that they had discharged Dr Humphrey of his liability under the lease or in any event by not running an esto argument on the basis that Dr Humphrey remained liable in response to the stance taken by Dr Turville. He referred to Millar v Dickson 2002 SC (PC) 30, Armia Ltd v Daejan Developments Ltd 1979 SC (HL) 56 and Moodiesburn House Hotel Ltd v Norwich Union Insurance Ltd 2002 SLT 1069. Secondly, he submitted that the landlords were personally barred from pursuing such a claim as Dr Humphrey had relied on their representation that they would not pursue him in absenting himself from the proof in the first action, except as a witness of fact, and he had suffered detriment in being exposed to the expense of the second action and the claim that he was liable for the whole of the obligations of the former partnership under the lease without having recourse against his former partners for pro rata relief. In this regard he referred to Gatty v MacLaine 1921 SC (HL) 1. In the defences to this action Mr MacDonald also advanced a plea of res judicata but recognised in his Note of Arguments that I would repel the plea in the light of my analysis in my earlier decision. He therefore intimated that he sought to reserve the right to revisit the plea before a higher court.

[10] Mr Thomson for Dr Ravangave sought dismissal of the action on two bases. First, he submitted that Dr Humphrey as a co-cautioner of the liabilities of the dissolved partnership had been discharged from his liability to the landlords by their release of his former partners. This release arose through the landlords' conduct of the first action which resulted in Lord Glennie pronouncing decrees of absolvitor. He referred to section 9 of the 1856 Act, Miller & Brough, "The Law of Partnership in Scotland" (2nd ed. 1994) pp.283-4 and the Stair Memorial Encyclopaedia, Vol.3, "Cautionary Obligations and Representations as to Credit" at paragraph 976. Secondly, and in any event, he submitted that if Dr Humphrey had any continuing liability to the landlords, that liability was restricted to a one-third share of the total liability. This resulted from the landlords' release of his former partners who until that release had been jointly and severally liable with him for the obligations of the former partnership. He referred in this context to Morgan v Smart (1872) 10 M 610. This restriction of the liability of a joint and several obligant to pro rata liability was the response of Scots law to a creditor's release. In English law the general rule was that the release of a joint and several debtor effected the release of all: Nicholson v Revill (1836) 4 Ad. & E. 674, North v Wakefield (1849) 13 QB 536 and Deanplan v Mahmoud [1993] Ch 151.

[11 Mr Thomson also attacked the assertion that Dr Humphrey had a right of relief against his former partners. A right of relief arose only if one party to an obligation in solidum had discharged more than his share of that obligation or procured the liberation of the others: Stair, Institutions, I, 8, 9, Bankton, Institutes I, 9, 45, Bell's Principles (10th ed.) s.62, and Moss v Penman 1993 SC 300. He also referred to the recent decision of the Supreme Court in Farstad Supply AS v Enviroco Ltd [2010] UKSC 18, Lord Mance at paragraphs 52 and 54. In short, as the decree of absolvitor pronounced by Lord Glennie had released Dr Ravangave and Dr Turville from any liability to the landlords, any payment by Dr Humphrey beyond his one-third pro rata share did not discharge a subsisting liability on their part. In consequence Dr Humphrey had no right of relief against his former partners.

[12] Mr Beynon for Dr Turville adopted Mr Thomson's submissions on those matters and also Mr MacDonald's submissions on waiver and personal bar. In summary, the decree of absolvitor pronounced in favour of Dr Ravangave and Dr Turville in the first action meant that they had no subsisting obligations to the landlords under the lease. In relation to the nature of a co-obligant's liability he referred me to Wilson, "The Scottish Law of Debt" (2nd ed.) chapter 28 and Gloag & Henderson (12th ed.) paragraphs 3.14-3.17 and 46.11- 46.12. If Dr Humphrey had to meet all of the former partnership's liability under the lease without recourse against his former partners, that was prejudice caused by the landlords' representation that they had discharged him from liability under the lease. Even if Dr Humphrey were liable only for his pro rata share, the landlords' conduct of the first action had prejudiced him by exposing him to unnecessary expense in the second action.

[13] Mr MacNeill QC for the landlords submitted that there was no basis for Dr Humphrey's plea of res judicata as Lord Glennie had not determined any question between the landlords and Dr Humphrey. In relation to the plea of waiver, he submitted that the plea did not arise as the person abandoning a right had to be aware of the existence of the right: Millar v Dickson, Lord Bingham of Cornhill at paragraphs 33 and 35, Lord Hope at paragraphs 53, 57 and 58. There was no voluntary, informed and unequivocal abandonment. He submitted that Dr Humphrey had no basis for his plea of personal bar as in his defences to the first action he admitted that he had been discharged and denied Dr Turville's averments that the partnership had been dissolved in 2002. Thus he had not relied to his detriment on a position adopted by the landlords; on the contrary he positively asserted that position which coincided with what the landlords then believed. In any event Dr Humphrey had suffered no detriment as his involvement in expense in the second action was balanced by his having been relieved of expense in the first.

[14] He submitted that section 9 of the 1856 Act did not apply to the liability of a partner or former partner for the debts of a continuing or dissolved partnership. Section 9 when interpreted in the context in which it was enacted (sections 6 and 7 now being repealed) dealt only with cautioners properly so called. He referred to Clark on Partnership (1866) at pp.276-278. Partners were not cautioners but had a subsidiary liability under the Partnership Act 1890 (sections 9 & 38), which was merely similar to that of a cautioner. Miller & Brough at pp.283-285 did not express a contrary view.

[15] Mr MacNeill submitted that the effect of the decree of absolvitor was only that the landlords could no longer sue Dr Ravangave and Dr Turville. The landlords could still sue Dr Humphrey for all the sums due under the lease as he had joint and several liability and he could seek relief from his former partners. In other words a right of relief could continue to exist even when the debt had ceased to be exigible against the person from whom relief was sought. The partners' obligations for a partnership's debts arose by operation of law and their rights of relief inter se did not depend upon the survival of the third party claimant's right of action against all of the partners. As a fall back he submitted that, if Dr Humphrey had no right of relief against his former partners, the landlords were still entitled to recover from him his pro rata share of the liability of the former partnership: Morton's Trustees v Robertson's Judicial Factor (1892) 20 R 72.

Discussion
[16] It is appropriate before turning to the arguments of waiver and personal bar to deal first with the question whether Dr Humphrey has a right of relief against his former partners and, if he has not, the effect of the loss of that right. This involves also the interpretation of section 9 of the 1856 Act.

(i) The nature of the right of relief

[17] The relevant law relating to the circumstances in which a right of relief arises among co-obligants, who have joint and several liability in relation to a contractual obligation, is well-established. It can be summarised as follows.

[18] First, any one of the co-obligants is liable to the creditor for the whole amount of the debt. The insolvency of another co-obligant does not affect that liability. Secondly, in a question between the co-obligants, each is liable only for his pro rata share. Thus, thirdly, if a co-obligant pays more than his pro rata share of the debt to the creditor, he can recover the excess from his co-obligants. This is the co-obligant's right of relief. In calculating the number of pro rata shares, and thus the amount for which relief may be claimed, one ignores any insolvent co-obligants. It follows from the rule that the right of relief arises through payment of part or all of another's share, which releases the other to that extent from his obligation to the creditor, that, fourthly, the right of relief of the paying co-obligant against another co-obligant arises only where the other has a liability to the creditor when the payment is made.

[19] As the fourth point lies at the heart of the parties' debate in relation to the continued existence or otherwise of the right of relief, it is appropriate to expand on that point. Lord Stair stated (I, 8, 9):

"From the natural obligation of recompence doth arise the obligation of relief, whereby when many persons are obliged in solidum, and thereby liable conjunctly and severally, payment and satisfaction made by one for more than his share doth oblige all the rest pro rata, although there be no conventional clause of relief, nor any law or statute, but the natural obligation of recompence; for he who paid not only for himself, but for others, is not presumed to do it animo donandi".

Similarly Lord Bankton stated (I, 9, 45) that the right of relief arises because

"payment made by the one, which procures liberation to the rest, obliges them to indemnify him proportionably."

Erskine in his Institute (8^th ed.) III.3.74 stated:

"One of several correi debendi, who hath paid the whole debt, is entitled, even without an assignation from the creditor, to a proportional relief against the rest; which proportion must in every case be so stated that the loss shall fall equally on all the obligants who continue solvent."

In s.62 of Bell's Principles (10th ed.), the author stated in relation to co-obligants:

"If bound 'jointly and severally,' any one may be selected by the creditor for payment of the whole. ...[T]he person who shall pay the portion of another will be entitled to relief to that extent, without an assignation."

In his Commentaries (7^th ed. 1.364), Professor Bell said:

"Relief is the indemnification that a co-obligant paying more than his share is entitled to demand from those who are bound along with him."

The point was put similarly by Lord Watson (in the analogous context of relief among wrongdoers) in Palmer v Wick and Pulteneytown Steam Shipping Co (1894) 21 R (HL) 39 (at p.45) thus:

"The claim of relief rests ...upon the fact, as Lord Bankton puts it, that by the use of [the claimant's] money the rest have been freed from their obligation - a circumstance which, in ordinary cases, is sufficient, according to the law of Scotland, to raise a right of relief."

These venerable writings and the nineteenth century case law remain good authority: see Moss v Penman 1993 SC 300, in which the Lord President (Lord Hope) cited them or related passages with approval.

(ii) Whether the decree of absolvitor removed Dr Humphrey's right of relief

[20] In the first action, as I have said, the landlords sought a declaration that Dr Ravangave and Dr Turville, as former partners, were jointly and severally liable for all of the tenant's obligations under the lease. That liability arose from their status as former partners of the dissolved partnership. But the decree of absolvitor, which Lord Glennie pronounced, has determined conclusively that they have no such liability. As the basis of a right of relief is that A, by paying off a debt, which he, B and C are jointly and severally liable to pay, has discharged a subsisting obligation of B and C, it appears to me that the decree of absolvitor is fatal to any claim by Dr Humphrey for relief.

[21] Mr MacNeill's submission to the contrary required a theoretical liability to the landlords to survive so as to be invoked by Dr Humphrey as a basis of a right of relief although the landlords could not enforce that liability against Dr Ravangave and Dr Turville. In my opinion there is no such liability. The decree of absolvitor in the first action is, in my view, a conclusive statement of the non-existence of the obligation. Further, the decree cannot be equated with a discharge granted by a creditor to one co-obligant on part payment of the debt in which he expressly reserves his right to proceed against other co-obligants for the unpaid balance. In such a case the contract is a pactum de non petendo, an undertaking not to insist on payment, which is interpreted as preserving the co-obligants' right of relief against the discharged debtor. See, for example, Muir v Crawford (1875) 2 R (HL) 148; Morton's Trustees v Robertson's Judicial Factor.

(iii) The effect of the loss of the right of relief

[22] In Scots law, before the enactment of the 1856 Act, the release of a co-obligant, whether he was one of several principal debtors or a co-cautioner, did not release his co-obligants from all liability. It released the other obligants from any liability to pay towards the share of the released debtor. That remains the rule for co-obligants other than co-cautioners. The rationale is that because the creditor's discharge of A has deprived B and C of their right of relief against A, he cannot look to B and C to pay any of A's share. The rule restricts the liability of B and C to the creditor to the aggregate of their shares: Morgan v Smart (supra), Lord Justice-Clerk Moncrieff at p.615; Smith v Harding (1877) 5 R 147. Professor Wilson in his book on Debt at paragraph 28.7 spoke of the effect as being to release the other obligants from any liability beyond their pro rata share. In my opinion that statement could be misleading when there are more than two co-obligants before one is released; the law is more clearly stated by Gloag on Contract (2^nd ed.) at p.217:

"In Scotland the general rule used to be, and is still, except in cases where the co-obligants are co-cautioners, that the co-obligant is released in so far as his right of relief is prejudiced, and no further."

[23] Section 9 of the 1856 Act changed Scots law in relation to cautioners by providing that the discharge by a creditor of one of several co-cautioners without the consent of the others operated to discharge all of the co-cautioners. But this does not assist Dr Humphrey as a former partner as in my view the subsidiary liability of a partner for the debts of a partnership (or a former partner for the debts of the dissolved partnership) is not a cautionary obligation. There is nothing in sections 9 and 38 of the Partnership Act 1890 which give partners the status of cautioners. That the liability of a partner, through its subsidiary nature, resembles a cautionary obligation in some ways has long been recognised. For example, in Mair v Wood 1948 SC 83, the Lord President (Lord Cooper) (at p.86) described it thus:

"Partners are of course liable jointly and severally in a question with a firm creditor for the obligations of the firm, but the theory of Scots law views them as being liable only subsidiarie, the partners being in substance guarantors or cautioners for the firm's obligations, and each being entitled on payment of a firm debt to relief pro rata from the others."

But that does not make a partner's liability a cautionary obligation or give a partner the privileges of a cautioner.

[24] Clark on Partnership (in vol. 1 pp.276-277) stated that, in contrast to English law, the discharge of a partner did not operate as a discharge of the others. He cited the different common law rules in Scotland and England as the explanation. I agree. The subsidiary liability of a partner does not fall within the 1856 Act because he has not entered into a cautionary obligation properly so called. The 1856 Act as initially enacted required cautionary obligations to be in writing; see the now-repealed section 6. By contrast a partnership contract and thus the subsidiary liability of partners have never required such formality. While I note that Miller and Brough (at pp.283-4) express some doubt on the point, I do not share those doubts. The decision of the First Division in Morton's Trustees v Robertson's Judicial Factor is clear authority that a partner is not to be equated with a co-cautioner. Unless one could bring a partner's liability within the scope of section 9 of the 1856 Act, which in my opinion one cannot, the discharge of one partner in respect of a partnership debt does not operate as a complete discharge of the liability of his partner or partners.

[25] It follows therefore that, in relation to his right of relief, a partner is in the same position as a co-obligant who is a principal debtor along with another or others. To the extent that a creditor's discharge of partner A removes partner B's right of relief against A, partner B is released from his obligation to the creditor. Thus in a partnership comprising three partners, the release of A would limit the creditor's claim against either of B and C to two-thirds of the partnership's debt (if that were the aggregate of their pro rata shares); and the release of B and C would restrict the creditor's claim against A to only his one-third pro rata share.

[26] In short, the release of Dr Ravangave and Dr Turville from their liability under the lease as former partners has limited the landlords' claim against Dr Humphrey to his one-third pro rata share of the former partnership's liabilities.

(iv) Waiver

[27] I am not persuaded that the landlords have waived their right to pursue a claim against Dr Humphrey. Their averment in the first action that they had granted a discharge to him reflected, as I have said, a shared belief. While their counsel had suggested earlier in this action that the landlords knew that the averment was incorrect when they prepared their pleadings in the first action, Mr MacNeill's position was that they had believed that they had assented to Dr Humphrey's request for a discharge and only later discovered that they had not replied to the request. If that is correct, their averment cannot be treated as an abandonment of a right which they knew they had against Dr Humphrey. "Before a right can be regarded as waived, its holder must know of its existence": Reid & Blackie, "Personal Bar" (2006) at paragraph 3-11.

[28] The decision to abandon the reclaiming motion in my opinion does not support a plea of waiver. While it meant that the landlords could not pursue Dr Humphrey in that action because they could not found on the evidence that the partnership was dissolved in 2002, their decision was informed by counsel's advice that the Inner House would not overturn the Lord Ordinary's exercise of discretion in refusing the minute of amendment. Without the amendment of their pleadings, the landlords had no right to pursue Dr Humphrey in that action. I do not consider that the abandonment of a poor prospect of achieving amendment amounts to the waiver of a right which could be pursued in the action only if the amendment were allowed. The procedural impasse, in which the landlords found themselves when the evidence and submissions eventually disclosed the date of the dissolution of the partnership, caused the abandonment of the reclaiming motion in that action.

(v) Personal bar

[29] I do not consider that Dr Humphrey has pleaded a relevant case that the landlords are personally barred from pursuing their claim against him. It appears that Dr Humphrey believed that they would not pursue him because he had applied for and obtained from them a discharge of his liability under the lease and that he acted in reliance on that belief in absenting himself from the proof in the first action. But the belief that he had been discharged was one which, at the time, he shared with the landlords. There are no averments that the landlords induced him to believe that he had been discharged from any liability; it appears, as I have said, to have been a shared understanding. Thus any detrimental reliance by Dr Humphrey on that belief did not result from inconsistency on the landlords' part. In any event I am not persuaded that he suffered prejudice thereby. He was saved the cost of taking part in the proof in first action and the release of his former partners has not increased the extent of his liability to the landlords, for the reasons which I have discussed above.

(vi) Other matters

[30] Both Mr Thomson and Mr Beynon also made submissions about the effect of the indemnity which Dr Humphrey and Dr Ravangave gave Dr Turville under clause 6.4 of the partnership agreement. I do not need to record those submissions because, as a result of my decision on the principal issues in this case, the questions do not arise. It suffices to say that if I had had to decide the point I would have been inclined to the view that the indemnity clause properly construed in the context of the partnership agreement as a whole was broad enough to free Dr Turville from any liability arising out of the lease, whether directly through a claim by the landlords against all of the partners or indirectly through one or more of her partners seeking relief from her after meeting such a liability. The obligation to indemnify would in my view exclude an action to enforce a right of relief in accordance with the brocard, frustra petis quod mox es restiturus. See Farstad Supply AS v Enviroco Ltd, Lord Hope at paragraph 44.

Conclusion

[31] As a result the landlords' claim against Dr Humphrey is confined to his one-third pro rata share. Dr Humphrey's pleas of res judicata, waiver and personal bar fall to be rejected as irrelevant. His claims against the third parties fall to be dismissed as he has no liability in respect of their shares and therefore no right of relief. Dr Turville's claim for indemnity similarly falls as she has no liability from which to be indemnified. There may remain an issue whether she can claim indemnity in relation to the expenses which she has incurred in this action and I reserve judgment on that matter.

[32] I therefore repel Dr Humphrey's third to eighth pleas in law inclusive. I sustain Dr Ravangave's first plea in law, under reservation of any issue of the indemnity of Dr Turville in relation to expenses, and I sustain Dr Turville's first plea in law with the result that I dismiss Dr Humphrey's third party claims.

[33] By Minute of Amendment (Pro 62) the landlords sought to amend the conclusions and introduce a new third plea in law which supported a fall-back case that Dr Humphrey was liable to the extent of one-third of the former partnership's pecuniary liabilities under the lease. I will have the case put out by order to discuss the terms of the order to be pronounced in favour of the landlords and to deal with questions of expenses.