Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 171
CA56/10	OPINION OF LORD HODGE in the cause WILLIAM JOHN SIM Pursuer; against DAVID JOHN HOWAT; and BRIDGET MARY McLAREN Defender: ________________

Pursuer: Logan; Campbell Smith WS LLP

Defender: Campbell QC; Morisons LLP

30 October 2012

[1] Pattison & Sim (P&S") is a firm of solicitors which has existed since 1905. It has comprised various partnerships as people have retired or been assumed as partners. Between 1999 and 2006 the equity partners were the pursuer ("Mr Sim") and the defenders ("Mr Howat" and Ms McLaren" respectively). In 1998 Mr Sim and Mr Howat were the partners of P&S. Ms McLaren became a partner in 1999, having trained and worked in the firm for several years. Mr Sim, who was the senior partner of P&S, retired on 31 May 2006 and the defenders, who continued the business of the partnership, agreed to pay him the sum of £175,000 by monthly instalments over the following five years.

[2] In 2008 Mr Howat and Ms McLaren discovered that the partnership had a liability to the Scottish Solicitors' Staff Pension Fund ("SSSPF") arising out of the pension entitlement of a former employee, Mr Barr, who had acted as the firm's cashier. He left the employment of P&S in 1998. From this arose the dispute which has given rise to this action for payment under the retirement agreement and the defenders' counterclaim for damages for misrepresentation.

[3] In an opinion dated 5 July 2011 ([2011] CSOH 115) I held that the liability to pay contributions to the SSSPF had been taken over in 1999 by the partnership comprising Mr Sim, Mr Howat and Ms McLaren. The parties agreed to accept that finding and have proceeded to proof on that basis.

[4] Mr Sim seeks payment of £51,752.90 under the retirement agreement, having reduced the balance which he claimed by one-third of the sums which were due to the SSSPF in May 2006 to pay off arrears and buy out future liability. In so doing, he acknowledges that he is bound by a provision in the retirement agreement to pay his one‑third share of any liabilities which were not disclosed in the dissolution accounts to 31 May 2006.

[5] Mr Howat and Ms McLaren sought to reduce the retirement agreement on the ground that it was induced by Mr Sim's misrepresentation which they aver was either fraudulent or negligent. They also claimed damages totalling £120,000 arising from the misrepresentation and breach of fiduciary duty. As I narrate below, they sought to alter their claim by Minute of Amendment at the end of the proof.

The Facts

(i) The negotiation of the agreement

[6] For several years before he retired, Mr Sim aspired to retire at about his sixtieth birthday. His partners were aware that he wished to do so. All parties recognised that the principal difficulty which they faced was how the continuing partners could earn sufficient funds from the business to repay his capital. Discussions as to the terms of his withdrawal from the partnership began in about June 2005. In that month Mr Sim gave his partners a memorandum in which he set out various options, including the sale of the firm's principal asset, which was its office at 19 Glasgow Road, Paisley. Mr Sim expressed his preference that his partners continue the business and suggested that he could work as a consultant for five years before they had to start repaying him his capital by instalments. He also listed the possibility that the defenders buy part of the business and as a last resort the option that he continue to work and that his partners resign from the partnership.

[7] In the firm's accounts to 31 May 2005 Mr Sim was credited with capital of £253,994. In those accounts Mr Howat's capital account was in deficit and he owed the firm £25,151. Ms McLaren's capital was £66,724. The partners recognised that some of the assets of the firm might not achieve the value stated in the firm's accounts. In particular the partners thought that the value of debtors and work in progress had to be discounted. It was necessary to adjust the accounts to allow for a claim which a former employee was pursuing before an Employment Tribunal. Mr Howat and Ms McLaren were also concerned about the burden of taking on responsibility for both the firm's overdraft which at times exceeded £250,000 and also paying out Mr Sim's capital. They sought to negotiate a deal with Mr Sim based on what they considered they could afford to pay. In October 2005 the partners agreed to recalculate the assets of the partnership on a winding up basis as part of that negotiation. Mr Howat and Ms McLaren attempted to calculate what might be due to Mr Sim on that basis and initially, in about February 2006, offered to pay Mr Sim £137,500 for his share of the partnership business. Mr Sim was prepared to compromise as he recognised that some items in the accounts might be overstated and as he wished the firm to continue, because his family had been involved in it from the outset. He suggested that he be paid £200,000. After some informal negotiation the parties settled for the payment by the continuing partners of £175,000 by instalments over five years.

[8] Their agreement was not recorded in a written document. Mr Howat and Ms McLaren had prepared a draft minute of dissolution with the assistance of their accountant, Jim Hamilton CA, and Mr Sim had written suggested revisions of the text. The terms of the minute of dissolution were never formally agreed and the stated calculation of Mr Sim's entitlement was superseded by further negotiations. But the parties implemented several clauses of the minute.

(ii) The terms of the agreement

[9] It was not disputed that the agreement provided for (a) payment of £175,000 by monthly instalments of £2,916.66, (b) payment of interest on the unpaid balance at the base rate of The Royal Bank of Scotland plc, (c) interest on arrears of instalments (which the draft minute stated would be at 3% over that base rate but on which I heard no evidence) and (d) Mr Sim to indemnify the continuing partners to the extent of his share of liabilities not accounted for in the firm's accounts to 31 May 2006. In relation to the latter provision clause 16 of the draft minute stated:

"Mr Sim will indemnify the continuing partners in respect of any claims & liabilities of whatever nature in respect of any events relating to the period before 31 May 2006 and which have not been fully accounted for in the final partnership accounts for the year ending 31 May 2006. Where such claims arise and while capital balance remains payable to Mr Sim, he will authorise the continuing partners to offset against such balance his share of any such claim and appropriate costs."

On the draft minute Mr Sim wrote in manuscript the words "his share". It was not ultimately disputed that, while the precise wording of the clause was never finally agreed, the parties had agreed that the indemnity which Mr Sim granted was for his one‑third share of such liabilities. This informed Mr Sim's decision to reduce his claim by £43,521 after I issued my opinion to which I referred in paragraph [3] above.

(iii) The payment of the instalments

[10] Between 31 May 2006 and 28 October 2008 the defenders paid Mr Sim £75,833.15 towards repayment of his capital and £15,619.44 in interest in performance of the retirement agreement. They have paid no sums since October 2008.

(iv) The existence of the SSSPF liability

[11] After Mr Barr ceased to be employed by P&S none of the partners foresaw that they would have any continuing liability to contribute to the SSSPF. This is not surprising as an awareness of the effect on pension funds of increasing longevity and the poor performance of the stock market after 1999 took several years to spread within the legal profession. As I narrate below, it was not until April 2003 that the trustees of the SSSPF wrote to legal firms to inform them of the deficit which had emerged on the fund.

[12] The parties agreed in a joint minute that the sum required to discharge for all time the liability due to the SSSPF in respect of Mr Barr was £126,000 on 31 May 2006 and the sum required to achieve that result as at 28 August 2012 was £125,000. It was also agreed that at the latter date arrears of contribution from P&S to the SSSPF amounted to £44,000.

[13] The parties also agreed that for the purposes of this action and without prejudice to their rights and pleas in other proceedings each of them was liable to the SSSPF for one-third of the capital sum needed to discharge the liability (namely £126,000 in 2006 or £125,000 in 2012).

(v) Mr Sim's knowledge of the SSSPF liability

[14] This dispute is concerned with the extent to which Mr Sim was aware of a continuing liability of the firm to the SSSPF before he negotiated his retirement from the firm and his failure to disclose that liability to the defenders.

[15] P&S employed Mr Barr from 1970 until 1998. The firm paid contributions to the SSSPF when he was employed and ceased those payments thereafter. No demand was made for further payment for about five years and I accept Mr Sim's evidence that, when the SSSPF's administrators raised the issue of further contributions in 2003, he understood that his firm had no further liability as they had ceased to employ Mr Barr.

[16] There is no doubt that the correspondence which Mr Sim received from agents on behalf of the SSSPF, which I summarise below, gave clear notice of a continuing liability of P&S in respect of Mr Barr. If the recipient of the letters read them reasonably carefully, he could have been in no doubt that P&S had a continuing liability to the SSSPF. But it is important to see the letters in their temporal context and to take account of Mr Sim's approach to business as he approached his retirement when assessing both his state of knowledge and whether he acted in good faith.

[17] It was clear from Mr Howat's evidence that Mr Sim at least in later years adopted a rather casual approach to papers other than client files. Mr Howat spoke of Mr Sim stacking papers relating to the firm in wire trays both on his desk and on the floor in his office. Mr Sim had a rather haphazard approach to the filing of such papers and many remained stacked in piles on those wire trays for years after his retirement. The defenders discovered several of the letters on which they rely for their case of misrepresentation in those trays in Mr Sim's room when they cleared it out in 2011. Mr Sim appears to have been slow to respond to correspondence relating to the firm if his correspondence with representatives of the SSSPF is representative of his output. He appears to have concentrated on client business and to have given less of his attention to the administration of the firm.

[18] On 8 April 2003 Mellon Human Resources & Investor Solutions (Administration & Investment) Ltd, the secretaries the SSSPF, wrote on behalf of its trustees to the senior partners of all firms which were assenting employers under the SSSPF. (I refer to this company and another company, (Actuaries & Consultants), in the Mellon group of companies as "Mellon". Both wrote to P&S.) The letter intimated that the scheme actuary had reported on the scheme's funding and that it would be necessary to increase contributions significantly because of the deficit created by the fall in the stock market. It invited the addressees of the letter to attend a meeting of employers on 17 April 2003 and an EGM on 1 May 2003. Mr Sim recalled receiving the letter and said that he had a "moment of panic". But he concluded that it was just a circular. He stated that it never occurred to him that anyone from P&S would have to attend the meeting as Mr Barr had left the employment of the firm and he assumed that there would be no further liability.

[19] On 5 December 2003 Mellon wrote on behalf of the SSSPF intimating that the trustees had agreed to correct the deficit by requiring employers collectively to pay £80,740 per quarter until further notice. Mellon stated that that liability would be split between the firms based on the underlying liabilities of members and former members of the fund who were either receiving or were due to receive a pension from the fund. Mellon stated that all firms who had adhered to the fund and had not revoked their adherence would be liable, and not just those firms with active members immediately before the fund was closed to new entrants on 30 September 2003. In a schedule to the letter Mellon disclosed that the quarterly sum due by P&S from 31 December 2003 was £354 and stated that the Occupational Pensions Regulatory Authority had power to impose fines or other penalties if there were persistent delays in payment. The schedule contained an acknowledgement slip confirming receipt of the letter and noting that the quarterly payments were due. Mr Sim accepted that he had received this letter but that he had not given it proper attention.

[20] Mellon wrote a further letter on 28 June 2004 but I was not shown a copy of that letter. On 7 July 2004 Mr Sim replied to that letter stating briefly that the firm had no current employees in the scheme. This prompted a reply from Mellon in a letter dated 14 July 2004, which was found in Mr Sim's office. In the fourth paragraph of that letter Mellon clearly stated the basis of P&S's liability as follows:

"The Trustees considered that the most appropriate means of splitting the total cost of £80,750 per quarter was on the basis of the underlying liabilities of all members including pensioners and deferred pensioners as well as members active on 30 September 2003. The resultant amounts would be charged to the Firms who formerly employed those members. With regard to your Firm, we have one deferred pensioner, Mr R W Barr, listed as your former employee. The proportion of the total liabilities that his benefits represent is approximately 0.44% and applying that percentage to the total contribution required results in the contribution of £354 per quarter requested from your firm."

Mr Sim accepted that he must have received this letter which was found in his office. He did not recall receiving or reading the letter.

[21] On 30 September 2004 Mellon wrote a further letter to the senior partner of P&S calling a general meeting of employers on 27 October 2004. The letter explained in some detail that since 30 September 2003 the fund had been a closed fund, that further benefits would not accrue under the fund but that employers were due to pay contributions towards the provision of accrued benefits. It proposed a deed of amendment of the trust to facilitate the withdrawal of an employer from the fund on payment of a sum to pay off any arrears and secure its employee members' benefits in future. This letter also was found in Mr Sim's office.

[22] Mr Sim's failure to pay the four contributions due since December 2003 caused the SSSPF's solicitors, MacRoberts, to write by recorded delivery letter to the senior partner of P&S on 15 October 2004 requesting the payment of arrears amounting to £1416 within fourteen days. MacRoberts requested that if the recipient believed that he was not due to make the payment he should provide a detailed explanation together with any relevant supporting documents. That caused Mr Sim to reply by letter dated 20 October 2004 as follows:

"... We do not understand the position. There was only one member of staff on whose behalf we were making payments. He left the firm on or about 1997.

Please explain why contributions are apparently due for the quarters stated.

On hearing from you with a satisfactory explanation we shall make payment."

If one takes this letter at face value, it supports the view that Mr Sim had not applied his mind to the earlier letters which made clear the basis of P&S's liability. Mr Clancy when cross‑examining Mr Sim suggested that in sending this reply he was simply stalling. But Mr Sim rejected that suggestion; he said that he would not have written to MacRoberts as he did if he had understood the position.

[23] On 24 November 2004 MacRoberts wrote in reply to P&S explaining that the firm had not terminated its obligations to the fund, that a deficit had emerged on the fund since Mr Barr left the firm's employment and that the administrators had already advised the firm twice of its liability in respect of its deferred pensioner. Mr Sim explained in his evidence that he did not read the letter with sufficient care and failed to notice that there was a continuing obligation to make quarterly payments. He decided to pay the demanded sum. He explained that the firm was doing well at the time and had a turnover of between £700,000 and £800,000. He would not have been concerned about a claim for £354 per quarter. On 22 December 2004, after he had spoken to Christine Baird of MacRoberts on the telephone, he wrote a cheque for £1,416 to settle the outstanding balance and sent it to MacRoberts. Mr Sim gave evidence that after he had paid that sum he had it in his head that the matter had been dealt with. He accepted in evidence that that perception was wrong and that there was a continuing liability.

[24] Mr Sim filled in a cash input slip for the firm's accounts on which he stated that the cheque was paid to MacRoberts and was the balance due to the SSSPF. Controversially he allocated the payment to a "subscriptions" ledger. The defenders suggested that this was a deliberate attempt to conceal the payment and that it should have been attributed to a ledger entitled "superannuation scheme" which concerned pension premiums to Standard Life. They stressed that he had been the cash room partner and was very familiar with proper procedure. Mr Sim suggested that, while he did not remember his reasoning, the probable explanation for his so doing was that he considered the SSSPF to be a Law Society pension and he had thought that the "subscriptions" ledger, which included Law Society subscriptions, was the appropriate entry. He explained that Mr Barr had prepared the relevant cash input slips in the past and he had just signed them. He stated repeatedly that he had not attempted to deceive his partners.

[25] P&S made no further payments to the SSSPF while Mr Sim was a partner. Unsurprisingly, that provoked a response from the fund's administrators and advisers. On 25 March 2005 Mellon wrote to P&S to remind the firm that it had not paid the quarterly sum due on 31 December 2004 and to invite it to consider paying by standing order. Mr Sim gave evidence that he thought that he would have filed the letter and waited for a reminder. He could not explain why he would have done that. In fact the letter was not filed but was found in 2011 among a pile of paper in one of the wire trays in his room.

[26] Several months passed. On 18 January 2006 Buck Consultants ("Buck") wrote a letter to the senior partner of P&S and other firms to discuss the scheme actuary's report on the fund as at 1 April 2005, which was enclosed with the letter. In the second paragraph of this detailed letter Buck warned that the deficit on the fund had increased fourfold and now stood at £8.45 million. The trustees would have to impose a substantial increase in contributions. Mr Sim confirmed in evidence that he had received the letter, which was found in his office, but stated that he thought it was a circular containing details of the current state of the pension fund and did not give it proper attention. He said that he did not understand its implications. He explained that over one year had passed since he had corresponded with MacRoberts and the issue had escaped his mind. He denied the suggestion that he was stalling in order not to disrupt the negotiation of his retirement agreement. He stated that if he had received the letter he would have discussed it with his partners because the sums involved were significant and they needed to take account of the firm's continuing liability in the context of his retirement.

[27] On 23 February 2006 Buck wrote a private and confidential letter to the senior partner of P&S intimating that the firm's liability had risen to £1,396 per quarter. Mr Sim stated in evidence that he had no recollection of receiving that letter. He was firm in his evidence that he had never seen the letter. As it was a short letter he would have read it if he had received it. He stated that because he was then negotiating the terms of his retirement with his partners he would have discussed the letter with his partners and his accountant. I see no basis for rejecting his evidence on this matter. This was not one of the letters which the defenders found in his office in 2011. They obtained it from Bucks when preparing for this proof. While one would expect in the normal course of events that a letter of which a copy appeared in the files of a business organisation would have been sent, there is no other evidence that it was sent or delivered.

Events after 31 May 2006

[28] Mr Sim worked as a consultant for P&S for six months. Mr Howat and Ms McLaren continued the partnership business both from the Paisley premises and also from the firm's estate agency office in Byres Road, Glasgow.

[29] The continuing partners re-presented the partnership accounts so that each of the partners started with similar capital accounts. This was achieved by attributing to Mr Howat's capital account the difference between the book value of Mr Sim's capital account and the £175,000 which he had agreed to accept. In about May 2006 Mr Howat and Ms McLaren instructed Mr David Hall to produce a valuation of the Glasgow Road office and were advised that the property had a value of £300,000 on a going concern basis. This was £90,000 more than the book value of the property which Mr Sim had not questioned in the negotiation of his retirement agreement. In the following years the firm did not make large provisions for bad debts but Ms McLaren gave evidence, which I accept, that £35,000 of the £55,000 which was due from clients in 2006 remained outstanding in 2012.

[30] The firm's profitability declined in the difficult economic circumstances which have existed since 2007 and the partners continued to draw funds from the firm. Turnover fell from £774,944 in 2006 to £313,354 in 2011 and net profits fell from £203,220 to £50,000 between those years. The defenders continued to drawn funds from the firm. As a result in the latest accounts to 31 May 2011 Mr Howat had a negative capital balance of £10,731 and Ms McLaren had a positive balance of only £383.

[31] Mr Howat and Ms McLaren first became aware of the firm's continuing liability to the SSSPF in August 2008 when Bucks wrote to the firm. They raised the issue with Mr Sim. His view at the time, and also in this litigation until my decision mentioned in paragraph [3] above, was that he and Mr Howat were responsible for the SSSPF liability as the former partners of the partnership which existed until 1999 and that it was not fair to impose that liability on Ms McLaren. After the issue was clarified at debate, Mr Sim accepted that he was liable to the extent of one‑third and offered to reduce his claim by that amount. The parties were not able to settle their differences and Mr Sim amended his claim to deduct his one‑third share of (a) the liability for arrears that existed at 31 May 2006 and (b) the sum then required to pay off future liability to the SSSPF.

Whether there was a fraudulent misrepresentation?

[32] The defenders' case of fraud against Mr Sim rests on the terms of the letters which he received and his failure to disclose the SSSPF liability before he retired in May 2006. It was not disputed that the letters gave clear notice of a continuing liability. The defenders also suggested that Mr Sim's recording of the payment of £1,416 in the subscriptions ledger on 22 December 2004 was an attempt to conceal the liability, both because it involved an inappropriate ledger and also because there was a greater chance that Ms McLaren who was then the cash room partner would not pick it up in the festive period. As the defenders were not aware of the problem at the time, their case of fraud rests on inferences which they have drawn from the correspondence and Mr Sim's behaviour.

[33] In assessing their case, much depends on my assessment of Mr Sim's evidence and my analysis of the surrounding circumstances.

[34] Mr Sim's recollection of events was patchy. I formed the impression on several occasions that he was suggesting what he would have thought at the time rather than recalling what had occurred. He accepted that he had thought about the matter frequently since the dispute arose. When challenged on cross-examination he accepted more than once that his position in his witness statement about his understanding could not be correct. But I formed the view that he was an honest witness and accept his testimony that he did not attempt to deceive his partners.

[35] Mr Howat stated that Mr Sim was not personally very concerned about money. I accept that insight which was consistent with my impression of Mr Sim when he gave evidence. His partners complained about his repeated failure to send out fee notes in a timely manner which meant that the firm had difficulty in recovering payment for his work. On the other hand both Mr Howat and Ms McLaren sought to suggest that Mr Sim had expertise in private client work relating to investment, and inferred that he must have understood more than he suggested about the pension liability. But I accept Mr Sim's evidence that, while he was responsible for private client work, he relied on stockbrokers to give investment advice to his clients and acted simply as a conduit for that advice. Evidence of his dilatory submission of fee notes and his failure to charge appropriate outlays to clients supports the view that he did not focus on money matters. So also does his taking on the firm's obligation to pay pensions to his mother and uncle. For Mr Sim to commit fraud would have been contrary to his partners' own assessment of his personality. Mr Howat gave evidence that he had had "100% trust and confidence" in Mr Sim, with whom he had worked for about 20 years. Ms McLaren similarly gave evidence that they had all worked together for many years and trusted each other.

[36] I consider also that while the letters when read together make the firm's liability very clear, the court must also have regard both to the time which passed between each of them and also to the priority which Mr Sim gave to client business over the administration of the firm. Accordingly, while I readily understand the shock which Mr Howat and Ms McLaren felt on discovering the SSSPF liability and the undisclosed correspondence, I do not draw the inferences of dishonesty which they have. Having regard to his approach to business matters which did not relate to his clients, which I discussed in paragraph [17] above, I think that inattention to complicated correspondence is the more likely explanation of Mr Sim's conduct.

[37] I support that view by my analysis of the surrounding circumstances. Until early 2006 when the quarterly sum which the SSSPF demanded increased fourfold, the claim was not a significant one even in context of a firm which was trying to control its outgoings carefully. In 2006, when the partners were negotiating the terms of the retirement agreement, it would have made no sense for Mr Sim to conceal the liability. If he had been aware of the SSSPF's claim, he would have thought that its representatives were likely to press its claim shortly after he ceased to be a partner as arrears mounted. There would have been no benefit in postponing resolution of the problem. It would not have been foreseen that it would take over two years for them to write to P&S after they received no response to their letter of 23 February 2006. Further, Mr Sim left several of the letters in the stacks of paper in his office when he retired. The defenders could have discovered them whenever they sorted out his office. I do not accept Mr Howat's suggestion that Mr Sim was motivated to conceal the liability because he wanted nothing to prevent him retiring. I am not persuaded that Mr Sim was determined to retire aged sixty and think it likely that if the SSSPF liability had prevented him from reaching an agreement for his partners to continue the business, he would have carried on working as a solicitor.

[38] I therefore do not accept Mr Clancy's submission that Mr Sim's conduct had been fraudulent since July 2004 or that he was fraudulent in his negotiation of the retirement agreement in 2006.

Whether there was a breach of fiduciary duty?

[39] Mr Sim conceded that he had breached his duty to his partners in failing to digest the import of the letters concerning the SSSPF and in failing to inform his partners of their terms. He was in a fiduciary relationship with his partners and he owed them a duty of the utmost good faith (Helmore v Smith (1885) 35 Ch D 436, Bacon V-C at 444). I am persuaded that Mr Sim did not act dishonestly and that he was not seeking personal gain at the expense of his partners by not disclosing the SSSPF liability. He therefore did not act in bad faith. But he was in breach of his duty of care to his partners in the conduct of partnership business and, in the context of the negotiations, he breached his obligation under section 28 of the Partnership Act 1890 which provides:

"Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives."

[40] The duty under section 28 is not a duty which is owed at all times. Partners are not obliged to inform their colleagues of everything which occurs in the course of partnership business as otherwise one could not delegate management powers to a managing partner while allowing others to concentrate on earning income for the firm. The duty arises in specific circumstances. Examples of those circumstances include when a partner seeks information from another or when in the context of negotiations between the partners, one partner has information relating to the partnership which is material to the subject matter of the negotiation. In the latter case section 28, which falls to be interpreted in the context of the obligation of the utmost good faith, places the partner under an obligation to disclose that information to his partners. That is relevant in this case as the partners were negotiating Mr Sim's withdrawal from the firm.

[41] Mr Sim repeatedly admitted his failure of duty in his evidence. I understood his concession to relate both to his duty of care in dealing with the correspondence and also his duty to inform. In relation to the former, there is still some debate in our courts whether the historical subjective standard of care applies or has been replaced by an objective standard which the courts have formulated in different ways (Winsor v Schroeder (1979) 129 NLJ 1266, Tann v Herrington [2009] PNLR 22, and Ross Harper & Murphy v Banks 2000 SLT 699). But I consider that Mr Sim was correct in his concession. On any of those standards his failure to read the letters thoroughly and communicate their content to his partners amounted to a failure in his duty once the amount of the continuing liability became material in the context of the firm's business.

[42] I consider that Mr Sim's failure to inform his partners of the SSSPF liability, particularly once he had received notice in January 2006 of a fourfold increase in contributions when he was negotiating his retirement agreement, was a breach of his duty under section 28. The parties did not address in any detail when the liability to the SSSPF became material. Mr Clancy took the stance that the liability was material from the moment it arose. I doubt whether the liability was material when the quarterly sum sought was only £354 and am not persuaded that Mr Sim was under an obligation to disclose the liability at the outset of the negotiations in 2005. Arguably there should have been disclosure because of the risk that the SSSPF would have to increase the contributions. But I do not need to decide that matter because in my view once the SSSPF intimated a four-fold increase in the quarterly payment Mr Sim was under a clear duty to inform his partners of the liability. See Lord Wylie's opinion on the contractual duties of partners in the negotiation of the terms of a partner's retirement in Ferguson v Patrick & James WS 1084 SC 115 at 119.

[43] I do not therefore have to consider whether his failure to disclose the SSSPF liability amounted to a misrepresentation where I have rejected the allegation of fraud. It is established that Mr Sim was in breach of his contractual duty as a partner. The remaining question is whether those breaches of duty caused loss to the defenders.

What an actual dissolution of the partnership would have entailed

[44] The defenders' pleaded case is that if Mr Sim had disclosed the SSSPF liability, they would have wound up the partnership business. In the defences to the action the defenders averred that if they had been aware of the SSSPF's claim "they would not have entered into any agreement with the pursuer to acquire his share in the business." They averred that "the outcome would have been a dissolution of the firm with the pension liability (past and future) included in the debts of the firm."

[45] But a difficulty emerged in the proof when it became clear to them that a winding up would not only diminish Mr Sim's claim but also be financially catastrophic for them. It is surprising that the defenders were not aware of this well before the proof started as their expert witness, Mr Thomas Hughes CA, stated in his witness statement that the dissolution accounts presented a "disastrous scenario". In his report Mr Hughes advised that on a winding up Mr Sim's entitlement would amount only to £67,240. The defenders seized on this to argue that they had overpaid him. But that ignored Mr Hughes' calculation that a winding up would result in Mr Howat having a deficit of £204,760 on his capital account and Ms McLaren a deficit of £115,760 on hers, which they would have to make good to pay Mr Sim's reduced capital claim and third party creditors of the firm when the business was being wound up. In his oral evidence Mr Hughes said that a winding up was "worst for all parties".

[46] I heard a considerable amount of evidence which suggested (a) that the costs of relinquishing the lease of the premises at Byres Road, Glasgow had been overstated and (b) that it would not have been necessary to write off as much from debit balances and outstanding fees as Mr Hughes suggested. There were inevitably many uncertainties in the estimation of the outcome on a winding up which had not occurred. But even if it were correct that the challenged figures were overstated to the extent suggested, that would at best reduce the firm's net deficit from Mr Hughes' figure of £253,280 to about £140,000 and reduce each of Mr Howat's and Ms McLaren's capital deficits by about £38,000. It would not alter the position that a winding up would have been a catastrophic result for them.

[47] If Mr Sim, as he should have, had disclosed the SSSPF liability, all of the partners would have sought professional advice. They would have been advised to avoid a winding up and would have had to negotiate some other arrangement. The defenders were understandably concerned about the burden of taking on the firm's overdraft and also repayments of capital to Mr Sim. They were aware that they had not recruited successors to take over the business from them. But if they obtained proper advice they would have been told that they were already liable for the firm's debts and that they would have to reach an arrangement with Mr Sim on that understanding.

[48] The defenders therefore failed to prove that they would have wound up the business if Mr Sim had disclosed to them the firm's liability to the SSSPF.

The defenders' proposed amendment

[49] Mr Clancy, recognising this difficulty, did not argue that there would have been a winding up and stated that the defenders no longer sought to set aside the retirement agreement and limited their claim to damages. But he also sought to amend his pleadings after all of the evidence had been led by adding the following averment:

"Alternatively the defenders are entitled to damages for the loss of the opportunity to buy out the pension liability before contributions were increased in January 2006. They are entitled to damages in respect that the pursuer would have met half the liability for pension contributions if that liability had been disclosed by him before the agreement was reached."

He submitted that the amendment should be allowed as an expansion or development of his pleaded case as his defences contained the statement that if the defenders had known of the liability they and Mr Sim could have negotiated with the SSSPF to limit their continuing liability. He suggested that the amendment involved no prejudice to Mr Sim as the point required no factual investigation.

[50] Mr Logan opposed the application, arguing that it came far too late after the parties had fruitlessly spent large sums of money investigating the likely outcome of a winding up. The defenders had advanced their case on the basis that the agreement should be reduced and had presented a detailed claim for damages on the hypothesis that the business would have been wound up. The pursuer had answered that claim. The matter of the lost opportunity had not been explored in evidence. While the opportunity may have been lost, it was not the case that Mr Sim had come to answer. The court did not have any evidence about the terms on which the SSSPF might have allowed a buy out of liability before the contributions were increased in 2006. In any event, Mr Howat did not have the means to pay a substantial sum. The court could not re-write the agreement which the partners had reached. There was no reliable evidence to suggest that the defenders had suffered any loss.

[51] As the issue of amendment was linked to my assessment of the evidence and counsel's wider legal submissions and also to an objection which Mr Logan had taken to a line of evidence by Mr Hughes that a different deal would have been struck, I reserved my decision on the motion until I addressed the substantive issues.

[52] Mr Clancy submitted that because Mr Sim had been willing to shoulder one‑half of the liability to the SSSPF, the defenders' loss arising from his breach of duty comprised (a) one‑half of the cost in 2006 to buy out the SSSPF liability and (b) one half of the arrears which had accumulated since 2008 and (c) the loss of an opportunity to buy out the SSSPF liability before it was increased in January 2006. He urged me to do practical justice in face of Mr Sim's admitted breach of duty.

[53] I saw the force of Mr Clancy's point that I should recognise that Mr Sim's disclosure of the SSSPF liability in performance of his duty to his partners would have affected the terms of the retirement agreement. But it is necessary also to consider the fairness of the legal proceedings.

[54] The defenders' case since they belatedly intimated their counterclaim was that they had suffered loss by implementing the agreement as they would have achieved a better result for themselves in a winding up of the partnership. Their pleadings do not give fair notice of a case for damages on basis that agreement remained in place nor was evidence adduced from the defenders themselves to support that basis of calculating loss. I allowed Mr Clancy to ask questions of Mr Hughes in relation to that case under reservation of questions of competency and relevancy. Having considered the evidence as a whole, I am persuaded that it would not do justice between the parties if the defenders were allowed to advance this case. On the contrary, Mr Sim would be prejudiced by having to face a case for which he had not had the opportunity to prepare and on which he had not been invited to comment in the proof. I therefore sustain Mr Logan's objection.

[55] In any event, I am not persuaded that the limited evidence supports the conclusions that Mr Clancy asked me to reach. If Mr Sim had disclosed the SSSPF liability in the course of the negotiations of his retirement agreement, it is clear, as I have stated, that all parties would have sought expert advice. Mr Sim might indeed have been willing to bear a one‑half share of the liability as he felt that it was unfair that Ms McLaren should be burdened with the obligation. But we do not know what his attitude would have been if he had been advised that she was already liable for a one‑third share as a matter of partnership law. Nor is there any evidence from which the court can infer whether Mr Sim would have reviewed (i) the concessions he was prepared to make in relation to the valuation of debtors and work in progress, (ii) his undertaking responsibility in future for pensions to his family members and (iii) his attitude towards the valuation of the Glasgow Road office. As Mr Logan pointed out, his concessions reduced his capital account by about £85,000 and his acceptance of the book value of the Glasgow Road office understated his share of that property by about £30,000. I cannot conclude that it is likely that he would have made those concessions and also paid a one‑half share of the SSSPF liability, if the parties had discussed that liability before finalising the retirement agreement.

[56] I am also persuaded that I should refuse Mr Clancy's motion to amend his pleadings. It is not in the interests of justice that he be allowed to advance a claim for loss of an opportunity when Mr Sim was given no notice of the claim. Further, there was no sufficient evidential basis for the claim. The only evidence to which Mr Clancy could point was a passing comment in paragraph 38 of Ms McLaren's witness statement that the defenders had been deprived of the opportunity of investigating matters and minimising any liability to the SSSPF. But Ms McLaren also stated that her attitude would have been that it was not her responsibility and she would not pay for it. Everything else in the claim was left to inference. The partners might have investigated the possibility of a buyout with the SSSPF. But I think it is unlikely that they would have chosen to pay a substantial capital sum when the firm's annual liability was only about £1400. Mr Sim's attitude to the liability when it was raised in 2008 was that it was better simply to pay the contributions. There was no evidence of Mr Howat's attitude to a possible buy out. As his capital account was overdrawn, one might infer that he would not have been keen to incur a significant capital outlay. The matter was not adequately explored to allow me to reach any reliable conclusions. I therefore refuse to allow the pleadings to be amended as Mr Clancy sought.

The pursuer's claim under section 42 of the Partnership Act 1890

[57] I do not have to consider Mr Sim's claim for a share of the profits of the firm since he retired because the defenders have departed from their application to set aside the retirement agreement.

Summary

[58] I am satisfied that Mr Sim did not act dishonestly in his failure to inform his partners of the SSSPF liability. His breach of the duty of care which he owed his partners has given rise to this unfortunate dispute. But the defenders have departed from the pleaded basis on which they resisted liability under the retirement agreement and sought to advance an alternative case only at the end of the proof without a proper basis in pleadings or in evidence for that case.

Conclusion

[59] Mr Sim is entitled to the declarator as to the existence of the retirement agreement. He is also entitled to payment of the sum of £51,752.90 for which he concludes in the third conclusion. That sum is the product of deducting from the unpaid balance of his contractual claim for £175,000 a one-third share of the capital cost of buying out the SSSPF liability and of the arrears due on 31 May 2006. He is also entitled to be absolved of liability in relation to the counterclaim. But before issuing an interlocutor giving effect to my decisions I wish to be addressed on (a) the rates of interest stated in conclusions 1 and 3 of the summons and (b) the date from which interest is claimed in the third conclusion. I also wish counsel to consider the date stated in the second conclusion as it appears to be wrong. I will therefore have the case put out by order to discuss these matters and also the question of expenses.