Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION
	[2013] CSOH 155
CA100/07	OPINION OF LORD WOOLMAN in the cause EWEN DYCE Pursuer; against BRIAN FAIRGRIEVE and MORISONS SOLICITORS Defender: ________________

Pursuer: Mackenzie, Solicitor Advocate; Shepherd & Wedderburn

Defender: Duncan QC; Simpson and Marwick

17 September 2013

Introduction

[1] The pursuer was formerly a partner in Morisons, solicitors ("Morisons"). He resigned in May 2003. A question then arose as to the valuation of his share of the firm's assets. Despite discussions over several years, he was unable to reach agreement with his former partners. Accordingly, in September 2007 he raised the present action for count, reckoning and payment against them. It progressed slowly, not least because the parties agreed to the cause being sisted for a period of four years. In June 2013 they reached agreement on the principal sum. They were unable, however, to agree on the question of interest.

[2] The matter came before me for debate. The pursuer lodged affidavits from himself and his wife, who was employed as the Director of Finance and Administration at Morisons until 2009. Senior counsel for the defenders indicated that I could consider the two affidavits as part of the background circumstances, although I should not hold that any particular fact contained within them had been proved.

The Partnership Act 1890

[3] Both parties rely on the Partnership Act 1890. The relevant provisions are as follows:

"42. (1) Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per cent per annum on the amount of his share of the partnership assets.

...

43. Subject to any agreement between the partners, the amount due from surviving or continuing partners to an outgoing partner or the representatives of a deceased partner in respect of the outgoing or deceased partner's share is a debt accruing at the date of the dissolution or death."

Submissions

[4] The rival contentions can be stated shortly. The defenders maintain that all the conditions specified in section 42(1) are satisfied. Accordingly, it governs the matter. It follows that the pursuer is only entitled to simple interest at the rate of five per cent per annum from the date of his resignation on 23 May 2003. The pursuer submits that in addition to a section 42 claim for interest, an outgoing partner has an extra right under section 43. As the sum due to him constitutes a debt at the date he left the firm, he is entitled to interest at the judicial rate specified in Rule of Court 7.7 (eight per cent per annum) from that date. Further, as the defenders wrongfully withheld payment of that sum, he should receive compound interest.

The Facts

[5] Until 1 August 1999 the pursuer was a partner in the firm of Alex Morison & Co. On that date it merged with the firm of Bishop Robertson & Chalmers. The two firms of solicitors were of a similar size. They each had offices in Edinburgh and Glasgow. By merging, they aimed to save money. In particular, they intended to cut costs by operating from one office in each city.

[6] The new firm of Morison Bishop had over thirty partners. About three years after the merger took place, the partners in the pensions department decided to join another law practice. That seems to have unsettled the remaining partners. In any event there was a demerger. Morison Bishop was dissolved on 31 July 2002. The following day, two new firms, Morisons and Bishops, commenced business. During the period that the pursuer was a partner, Morisons had no written partnership deed.

[7] Following its dissolution, the partners of Morison Bishop could not agree upon the distribution of its assets. There was a dispute about the allocation of liabilities under the leases of the Edinburgh and Glasgow premises. One partner raised an action of count, reckoning and accounting in order to determine matters. The litigation took a long time to resolve. That might be attributable to the fact that these were five identifiable 'interests' in that action: (a) the pension partners, (b) the Morisons' partners, (c) the Bishops' partners, (d) the pursuer, and (e) a partner who retired at the time of the demerger. In any event, it was not until September 2011 that the parties agreed dissolution accounts. The action itself resolved on 24 February 2012.

[8] The slow progress of the Morison Bishop action affected the current action. The preliminary hearing took place on 26 November 2007 and was continued until 14 January 2008. Both that hearing and the subsequent one fixed for 28 May 2008 were discharged of consent. On 15 July 2008 the court sisted the cause pending the outcome of the Morison Bishop action. The court recalled the sist on 14 February 2012. The following month, the defenders revised their pleadings and admitted liability to account to the pursuer in the sum of £233,716. He did not accept that figure. He wished to see a detailed accounting, including the materials that vouched the defenders' calculations.

[9] Throughout 2012 the parties attempted to resolve matters, but without success. In January 2013, I reserved a four day diet of proof to commence on 20 August 2013. As indicated above, the parties then reached agreement on the capital sum due to the pursuer. On 20 June 2013, I granted the pursuer's unopposed motion for decree against the defenders for payment to him of the sum of £276,611.35.

The Pursuer's Affidavit

[10] The pursuer's affidavit provides an insight into his approach to the question of interest. He states that since resigning from Morisons, his main source of income has come from investments. He controls a company that purchases and lets commercial properties. It has required to obtain bank loans to finance its operations. Those loans have been subject to the market rates of interest. The pursuer has also invested in the stock market. He has calculated the return on a sum of £1,000 invested on 1 August 2003. Using the FTSE All Shares Index as his reference point, he calculates that it would have increased in value by 30 June 2013 to £1,626. If the dividends generated by those shares had been reinvested in shares, the capital sum would have increased to £2,300.

[11] The pursuer states:

"In light of the conduct of the Defenders during this litigation; their failure to maintain dissolution accounts; their failure to provide a verifiable and substantiated accounting, their failure to protect and preserve the data pertaining to my claim; their apparent failure to obtain, at the appropriate time, or take proper cognisance of, an expert accounting opinion; the fiduciary duties that they owe to me, the failure to make any payment (other than the £5,000 which was paid not only to me but to all former partners) to me in over 10 years, the use that the Defenders have had of my money for that time, and the risk to which my money has been (and still is) exposed I believe the interest should be compounded. If I had received my money, I would have been able to gain compound interest or pay off some of my borrowings. In the meantime the Defenders have been able to save themselves compound interest by using my money to reduce their borrowings. As a consequence my money has been used to fund their business from which they made profit, to help pay themselves these profits, and to enable them to repay capital to themselves."

[12] Although the pursuer complains that the defenders have had the use of his money over several years, he does not seek a share of the profits. His claim is one for interest.

Entitlement to Interest

[13] The dispute between the parties centres on the application of section 42(1). As Mr Mackenzie accepted, the relevant conditions are met. The pursuer has ceased to be a partner in the firm. The defenders are continuing in business using its assets and capital without having settled accounts with him. The parties did not make any agreement to deal with matters in a different fashion.

[14] Mr Mackenzie submitted, however, that an outgoing partner has an "extra" right to claim a higher rate of interest at common law. That right, he argued, is distinct from his statutory entitlement. Mr Mackenzie cited no authority in support of his proposition. If such a right exists, that absence is startling. One would expect to see clear evidence of its existence in the cases and treatises.

[15] Instead, the authorities all point in the opposite direction. Lindley & Banks on Partnership (19^th edn 2010) at para 25-24 states that: "The treatment of post-dissolution profits is now governed by section 42". It is not surprising that the 1890 Act regulates the position. While not a complete code, it provides a comprehensive regime for partnership matters. Here as elsewhere it aims to strike a balance. The object of section 42(1) is "to compensate the outgoing partner for the retention and use of his money in a business with which he has ceased to be associated as a partner": Miller The Law of Partnership in Scotland, (2^nd edn 1994) p 568. It is not intended to penalise the continuing partners: Sandhu v Gill [2006] 2 WLR 8.

[16] There is another point which undermines Mr Mackenzie's proposition. Over many years, jurists and judges have suggested that the court should be given the power to award interest at a rate greater than five per cent per annum: Lindley & Banks at para 25-31. Such observations would not have been made if outgoing partners could elect to claim interest at common law. The inference is that they are confined to the statutory rate.

[17] In my opinion, the pursuer is only entitled to claim interest on the basis of section 42(1). Although the summons has not been framed on that basis, Mr Mackenzie indicated that if I did not accept his principal argument, the pursuer was willing to accept payment on that basis. Mr Duncan's instructions were not to take any point of prescription or to insist upon a minute of amendment.

Simple or Compound Interest?

[18] Mr Mackenzie submitted that even if section 42 (1) did apply, it does not prohibit the award of compound interest. Miller (supra at p 568), provides some support for that view:

"The interest allowed by the section is simple interest. Where the continuing partners are also trustees of the deceased former partner they may in certain circumstances be liable in compound interest, but that liability will rest upon them in their character as trustees and not as partners."

[19] In the footnote to that passage, the editor refers to Roxburgh Dinardo & Partners v Dinardo 1992 SC 188. The facts of that case were highly unusual. After a partnership split up, one partner took all the net assets ("D") and the other ("R") took all the net liabilities. Subsequently a judicial factor was appointed to deal with the sequestrated estates of the firm. With the approval of the Accountant of Court, he applied compound interest at the rate of three per cent above base rate against D. When the judicial factor sought approval of his accounts, D raised the question of interest. Lord Prosser refused D's motion seeking to lodge a minute of amendment challenging the award of compound interest.

[20] In upholding that decision, the Second Division reviewed the authorities on the law of interest. Lord Justice Clerk Ross (at p 191) approved the statement in Maclaren's Court of Session Practice that

"Compound interest is usually restricted to cases where persons are in breach of their duty, where banks lend money, and where it is allowed by usage or acquiescence or by special agreement."

Lord Ross concluded that the circumstances were "special and exceptional" and justified the award of compound interest. Lord Sutherland (at p201) stated that:

"... Where there is a fiduciary relationship it is possible for an exception to be made to this rule. Whether such an exception should be made will ... depend on the circumstances of each case."

[21] As Dinardo was not concerned with section 42 (1), it must be treated with some caution in the context of the present case. Lindley & Banks describes it as an "exceptional decision": at para 20-39. But even if compound interest is available, the pursuer must establish that the defenders breached the fiduciary duties that they owed to him. Mr Mackenzie founded on three broad factors in this regard.

a. The defenders made no significant payment to account. The difficulty for the pursuer is that he was complicit in the decision to delay matters. He made no formal claim for four years after his resignation. He then agreed to the action being sisted for the next four years to await the outcome of the Morison Bishop action. No doubt that was a sensible course to take. It was not until that case resolved that a valuation could be made in the present action. As soon as the sist was recalled, the defenders admitted liability to account for a significant sum. The pursuer could have insisted it be paid by means of a motion for summary decree.

b. The defenders have been unable to produce a detailed accounting. Mr Mackenzie submitted that the defenders' failure in this regard amounted to "reckless disregard". In the circumstances of the case, that characterisation of matters is ill‑founded. The mere fact that an outgoing partner is not paid does not of itself constitute a violation of trust. In any event, there is a dispute about the vouching for Morisons' draft 2003 accounts. According to the defenders, the figures were supplied to the firm's accountants by Mrs Dyce and they expected to find the underlying workings on her laptop, but they were absent.

c. The defenders entered into settlement agreements with other outgoing partners in the relevant period. Contrary to the pursuer's inference that more accurate data was disclosed to other partners which was not provided to him, Mr Duncan explained that the payments to other partners were made on the basis of compromise settlements. In the present action, the parties were unable to reach a similar settlement.

[22] I therefore find that the case of wrongful withholding is not made out.

Conclusion

[23] The parties agreed that I should make my decision in principle, and that they would calculate the precise figure due to the pursuer. For the avoidance of doubt. My decision is that he is entitled to simple interest on the principal sum at the rate of five per cent per annum from 23 May 2003 until payment.