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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> IAN GRAHAM RENNIE AGAINST MARK DOUGLAS ST CLAIR RENNIE [2020] ScotCS CSOH_49 (26 May 2020)
URL: http://www.bailii.org/scot/cases/ScotCS/2020/2020_CSOH_49.html
Cite as: [2020] ScotCS CSOH_49, [2020] CSOH 49, 2020 GWD 18-260, 2020 SLT 619
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CA109/17
OUTER HOUSE, COURT OF SESSION
[2020] CSOH 49
OPINION OF LORD CLARK
In the cause
IAN GRAHAM RENNIE
against
MARK DOUGLAS St CLAIR RENNIE
Pursuer
First defender
Pursuer: McColl QC; Addleshaw Goddard
Defender: Turner; Ennova Law
26 May 2020
Introduction
[1] This action arises from a dispute amongst members of a family farming partnership
(“the partnership”). The pursuer seeks reduction of a notice expelling him from the
partnership and also seeks interdict to prevent it being held out or represented that he has
been expelled. The first defender, who is the pursuer’s son, contends that the notice of
expulsion is valid and resists the application for interdict. The case called for a proof before
answer.
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Background
[2] In addition to the first defender, the summons was served on four other defenders.
The second defender, D V Rennie & Co, is the partnership. The principal document setting
forth the terms of the partnership agreement is a Minute of Agreement dated 15 August
1994. The pursuer has been a partner in the partnership for many years. His son, the first
defender, was appointed as a partner on 1 February 2013 for a five year fixed term. The
third defender (the pursuer’s sister) and the fourth defender (the pursuer’s brother) are also
partners in the partnership. The other partner is a discretionary trust (“the trust”) which
was set up by the pursuer’s parents. The fifth defender was formerly married to the
pursuer. She is not a partner in the partnership. However, the pursuer and the first, third,
fourth and fifth defenders are trustees of the trust. The only defender who lodged defences
and entered appearance to defend the case was the first defender. For convenience, when
referring to the others, I will continue to use the designations of them in the summons.
[3] From about 2016, the personal and business relationship between the pursuer and
the first defender deteriorated. This deterioration was caused, at least in part, by a dispute
over the pursuer’s entitlement to receive certain net rental income generated by rental
properties at the farm. In due course, the pursuer indicated that he wished to withdraw a
significant part of his capital from the partnership. The first defender resisted the removal
of these funds from the partnership’s bank account, partly on the basis that the amount of
capital held on behalf of the pursuer was not known, as the partners had not reached
agreement on the annual accounts. On about 19 October 2017, the pursuer transferred
£273,000 from the partnership’s bank account to a bank account held in his own interests.
Following upon the pursuer’s withdrawal of this money, the first defender (acting in the
name of the partnership) commenced legal proceedings in the Commercial Court against the
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pursuer. Those proceedings sought, inter alia, repayment of the monies drawn by the
pursuer from the partnership’s account and various ancillary interdicts. By interlocutor
dated 25 October 2017, the pursuer was interdicted ad interim from drawing certain monies
from certain bank accounts. Thereafter, by interlocutor dated 31 October 2017, the pursuer
was ordained to repay the sum of £273,000 to the partnership under and in terms of section
47(2) of the Court of Session Act 1988. That action was sisted after the present action was
raised.
[4] By email on 26 October 2017, the first defender proposed to all partners and trustees
that a meeting of the trust and partnership should take place on 3 November 2017. While
the first defender did not state so expressly at the time, the purpose of this proposed
meeting was, inter alia, to discuss the potential expulsion of the pursuer as a partner. The
pursuer was unable to attend a meeting on that date, but indicated that he would be able to
attend a meeting on 30 October 2017 or in the weeks following 3 November 2017. The first
defender decided that he did not wish to wait and told the third and fourth defender of the
proposed expulsion and asked them, on 28 October 2017, to vote by way of e-mail. By
email, they each voted in favour of the expulsion of the pursuer. On about 30 October 2017,
the notice of expulsion was sent to the pursuer, executed by the first defender.
[5] The notice of expulsion dated 30 October 2017 was sent without any formal meeting
of the partners to discuss the proposed expulsion having taken place. The decision to expel
the pursuer was, as noted, taken by the first, third and fourth defenders. No formal vote of
the partners in the partnership was held. The pursuer was not requested to make
representations to the other partners about the issue of his expulsion. However, shortly
prior to his expulsion the pursuer had sent certain emails making comments about the
reasons for his withdrawal of the funds from the partnership’s account. The trustees of the
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trust were not, in their capacity as trustees, informed of the proposed expulsion or given an
opportunity to vote as trustees (and hence as decision-makers for the trust) on the proposed
expulsion of the pursuer as a partner. The pursuer was not informed of any proposal that he
was to be expelled or that a vote was to take place on his potential expulsion. He was not
given an opportunity to vote on his proposed expulsion. The third and fourth defenders
based their decisions to vote to expel the pursuer on information provided to them by the
first defender.
[6] The notice of expulsion stated:
“Dear Sir
D V Rennie & Co
I confirm that, having considered the matter, the partners of D V Rennie & Co have
decided to expel you in terms of clause 11 of the Minute of Agreement of the
Partners dated 15 August 1994.
The reason for your expulsion is your removing £273,000 from the main partnership
bank account, contrary to the provisions of the aforementioned Minute of Agreement
(including but not limited to clause 10(a) and 11(f)).
On behalf of the remaining Partners of DV Rennie & Co, I hereby give you notice
that you are expelled from the Partnership. Your expulsion will be effective from the
date that you receive this notice.
Yours faithfully
[signed by the first defender]
For and on behalf of DV Rennie & Co”
The key terms of the partnership agreement
[7] For present purposes, the key clauses in the Minute of Agreement are as follows:
Clause 9:
“Where any decision is required to be taken or any act authorised by or in relation to
the partnership such decision shall be taken or such act shall be authorised, in default
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of unanimous agreement of the partners, by a simple majority votes [sic] of the
partners. In the event of equality of votes Ian Rennie shall have a casting vote.”
Clause 10:
“No partner shall, without the express consent of the other partners, do any of the
following acts:
(a) draw, accept or endorse any bill of exchange or promissory note, or contract any
debt, on account of the partnership, or in any manner pledge its credit or employ its
funds, except in the normal course of its business;
…”
Clause 11:
“If any partner shall
(a) become apparently insolvent or enter into any composition or arrangement for
the benefit of his creditors generally,
(b) do any act prohibited by Clause 10 hereof,
(c) grossly neglect the business of the partnership,
(d) act any [sic] such a way as to bring his name or the reputation of the partnership
into disrepute,
(e) commit any act of serious professional misconduct, or
(f) act in any respect contrary to the provisions of this Contract or to good faith
between partners
then, in any of these events, the other partners may expel the partner concerned with
effect from such date as shall be specified in written notice given by or on behalf of
such other partners to the partner concerned who shall be deemed to have ceased to
be a partner on such date.”
The parties’ averments
[8] The pursuer’s averments included that the purported notice of expulsion of
30 October 2017 was invalid and of no effect. It proceeded upon an erroneous factual basis
that the pursuer drew monies from the partnership’s bank account to which he was not
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entitled. In fact, having given prior notice of his intention to draw his capital from the firm
(in accordance with the long established practice and an agreement as to the entitlement of
partners in the second defender to do so), the pursuer was entitled to draw £273,000 of his
capital. The purported notice was procedurally defective, for the following reasons:
“Prior to it being executed by the first defender, no meeting of the partners of the
second defender had taken place to consider the potential expulsion of the pursuer.
No decision to expel the pursuer as a partner had been taken by the partners of the
second defender (or, for the avoidance of doubt, all of the partners other than the
pursuer himself). No meeting had been convened of the partners (or the partners
under exception of the pursuer) for the purpose of considering and voting upon his
proposed expulsion. No opportunity had been afforded to the pursuer to make any
representations to the other partners as to any proposed expulsion. In these
circumstances, the purported notice of expulsion has been issued by the first
defender without the first defender having any power or entitlement to do so and
without having met the requirements of clause 11 of the Minute of Agreement.”
For these reasons, the pursuer sought reduction of the notice of expulsion and also sought
interdict against the first defender and the partnership from representing or holding out that
the pursuer has been expelled as a partner.
[9] In answer, the first defender averred:
“The pursuer was in breach of clause 10(a) of the 1994 Partnership Agreement. The
remaining partners were entitled to expel the pursuer in terms of clauses 11(b)
and/or 11(f) therefor. On 22 October 2017, the first defender wrote to the pursuer
and requested that the pursuer provide an explanation for his withdrawal of funds.
On 23 October, the pursuer responded asking ‘Why do you want to withhold my
money?’ On 27 October, he suggested that the withdrawal should be treated as a
loan. No request was made or consent given to a loan to the pursuer. Despite being
afforded an opportunity, no explanation justifying the withdrawal was proffered.
The 1994 Partnership Agreement does not provide for decisions to be taken
exclusively at meetings. The partnership agreement does not require an opportunity
for representations. In email exchanges among them, the first defender, the third
defender and the fourth defender indicated their votes to expel the pursuer. Their
agreement was sufficient to authorise the first defender to issue a letter of expulsion
dated 30 October 2017 to the pursuer on behalf of the other partners of the second
defender. The pursuer was fully aware that the factual basis of his expulsion was the
unauthorised withdrawal of funds. Clause 19 of the 1994 Partnership Agreement
provides for any dispute as to the pursuer’s expulsion to be referred to arbitration.
The pursuer has not availed himself of this provision. The first defender is content
for any dispute as to the grounds of expulsion to be determined by the Court.”
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The issue
[10] At the proof, the question of whether or not the pursuer was entitled to withdraw
monies from the firm’s account was not taken up. Accordingly, the issue for determination
is whether the purported notice of expulsion was invalid and falls to be reduced.
Evidence
[11] I have already summarised the background and so I restrict the following discussion
of the evidence only to additional salient matters. The pursuer gave evidence. Much of his
testimony, including his witness statement and supplementary witness statement,
concerned the history and background, and the circumstances surrounding his withdrawal
of the funds from the partnership’s bank account. He had fallen out with his brother (the
third defender) many years ago. Decisions about the partnership’s affairs were sometimes
made by email, including voting on matters. The issue of whether he could withdraw funds
from his capital account had been discussed by email, including an email from the first
defender asking the pursuer to explain why he had “drained” £273,000 from the
partnership’s bank account. By email dated 26 October 2017, the first defender had
proposed a “trust and partnership meeting” on 3 November 2017. The pursuer had replied
to say that he could not attend a meeting on that date. The pursuer expected that there
would be a meeting, but none took place and the notice of expulsion was issued. No other
witnesses were led for the pursuer.
[12] The first defender gave evidence. He accepted that he had completely fallen out
with the pursuer. He denied that this was prompted by the pursuer giving significant assets
to his own daughter, the first defender’s sister. Much of his evidence also covered the
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history and the circumstances which gave rise to the dispute about the pursuer’s ability to
withdraw funds from the partnership’s bank account. He denied that what was driving the
current dispute was that he had stopped the pursuer receiving his agreed rental monies
from properties of the partnership and was now also seeking to stop him drawing his capital
from the business. In response to it being put that he did not speak to the pursuer before
expelling him, the first defender explained that he had emailed the pursuer to ask why he
had taken the money, looking for an expression of remorse and reasons, but nothing had
come forward. When the first defender tried to organise a meeting for 3 November 2017, the
pursuer said he couldn’t make it. The pursuer did not offer any explanation as to why he
couldn’t attend and did not give any other dates, apart from the following Monday, which
didn’t suit the first defender because he could not get the trust’s lawyer to attend on that
day. The proposed meeting was to give the chance to the pursuer to explain his actions, to
the partners and the trustees, as the partners would be making a decision about expulsion.
[13] The first defender said in his witness statement that he sent an email to the third and
fourth defenders on 28 October 2017 proposing that the pursuer should be expelled. The
first defender had made his decision to expel the pursuer on that day. His oral evidence
included that, on reflection, he may have contacted the third and fourth defenders by phone
rather than email. He accepted that there was nothing sent from anyone acting as a trustee
saying that they agreed to the expulsion of his father from the partnership. He also accepted
that the pursuer had wanted a meeting. The first defender did not wish to wait to have a
meeting. At one point, he said it remained his evidence that he had sent an email. He did
not know why this email had not been produced. He was not aware of his solicitors having
asked for a copy of the email. He did not know whether he had a copy. He was not in the
habit of deleting emails. He denied that this email contained significant material that was
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deeply damaging to his position and that was why it had not been produced. He could not
remember what the email said. He could also not remember the content of conversations he
had with the third and fourth defender around this time. He had provided the wording
contained in their emailed responses. He was receiving legal advice at the time. He had
told his aunt and uncle (the third and fourth defenders) what to write, should they wish to
expel the pursuer. The first defender told them of the decision he had made and what they
had to state if they decided to do the same thing. They made their own decisions. He
accepted that two of the trustees, the pursuer and the fifth defender, were not contacted.
[14] In re-examination, he said that the partners had made the decision to expel. When he
wrote the letter of expulsion his understanding was that the decision could be taken by a
majority vote. The third and fourth defenders were their own people and made their own
decisions. He did not tell them what to decide. The email proposing the meeting on 3
November 2017 was sent to all partners and trustees. The email from the pursuer on 27
October 2017 was also addressed to all partners and trustees. It remained the first
defender’s position that he sent an email to the partners on 28 October. He had expelled his
father because he couldn’t see how they could go on. His father had crossed the line and it
was the taking of the money that caused the expulsion. There was no motivation to hang on
to his father’s capital account. After expulsion, the monies in that account would be paid to
his father as stated in the partnership agreement. He could not “100% say” that it was true
that he had sent an email on 28 October to the third and fourth defender. His memory was
that his uncle got back to him by email on the same day and his aunt the day after.
[15] The next witness was the fourth defender, Michael Rennie. In response to the
question of whether anyone had sought to influence him in the decision to expel the
pursuer, his recollection was very vague. He said that obviously the first defender, his
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nephew, had asked him if he thought it was a good idea and he thought it was. He had
been told by the first defender that the pursuer had emptied the partnership’s bank account.
That was a pretty good reason to say one didn’t want to work with him. The fourth
defender had acted on that information. He had no recollection of whether the information
had been provided to him by email or by phone. He did not attend a meeting about the
expulsion. That matter was dealt with by email and it needed to be dealt with relatively
quickly. He was given the choice of what decision to make, with suggested wording if he
was in favour of expulsion, but no suggested wording for a decision not to expel. In his
email to the first defender on 28 October 2017, he used the wording suggested to him by the
first defender: “I confirm that I would like to proceed with expelling Ian Rennie from the DV
Rennie Partnership”.
[16] Fiona Rennie, the third defender, then gave evidence. The reason she had sent her
email to the first defender, her nephew, expressing that she was in favour of expulsion was
because the pursuer had taken money from the partnership. She took her own decision on
the matter. No-one influenced her. She recalled that she used to work with someone whose
banks “closed on him” and she thought the same could happen here to the partnership.
The first defender had told her that the pursuer had withdrawn most of the money from the
partnership’s bank account. She did not know precisely when this had been said by him to
her. She thought the first defender indicated that he didn’t see an alternative to expulsion.
It was correct that the pursuer was not given the chance to make representations to her
about the possibility of being expelled. She had no recollection of the first defender at any
stage giving her advice about what should happen. It was her decision and it was not based
solely on information given by the first defender, but also on events from her previous
employment. While in her witness statement she said that the first defender sent her an
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email, prior to her expressing her positon on the expulsion, she could not now say that this
was correct. In her email of 29 October 2017 she had used the same form of words as the
fourth defender, these having been suggested by the first defender.
[17] The next witness was Stewart Allister, a chartered accountant who acted on behalf of
the partnership. His evidence largely concerned the accounting and financial history and
background, including previous withdrawals from the partnership’s bank account and
disputes which had caused recent annual accounts not to be finalised. Monies had been
withdrawn in mid-October 2017 by the pursuer. The witness could not say whether he had
previously seen the letter giving notice of expulsion. He had no input into any discussion
about expulsion, apart from what would happen if the money was not put back in.
[18] The final witness was Robbie Dalgleish, also a chartered accountant and from the
same firm as the previous witness. Mr Dalgleish had previously acted on behalf of the
partnership. He had stepped back after his relationship with the pursuer had deteriorated.
He gave limited evidence about certain financial matters but not about the expulsion issue.
Submissions
Submissions for the pursuer
Relevant legal principles
[19] Where a partnership deed permits decisions to be taken by a majority of partners,
this did not mean that a bare majority of individuals who happen to be partners could
impose decisions on the other partners without giving them a prior opportunity to discuss
and vote upon the issue: Miller, Partnership (2nd ed.), p185. Where a partnership deed
makes provision for the expulsion of a partner, the grounds on which expulsion may be
justified and the procedural requirements for the exercise of the power set out in the
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partnership deed will be strictly construed (Miller, p187). It is invalid to expel a partner for
an ulterior, private motive. An expulsion on that basis, even if it bears to meet the
provisions of the partnership deed, should be reduced (Miller, p506). Where the partners (or
some sub-set of them) are the body determining whether or not to expel, a failure to give the
person under threat of expulsion intimation of the grounds upon which expulsion is sought
and an opportunity to make representations will render the purported expulsion invalid
(Miller, p509). This is an application of the rules of natural justice (Barrs v British Wool
Marketing Board 1957 SC 72; Inland Revenue v Barrs 1961 SC (HL) 22; Stair Memorial
Encyclopaedia (Reissue), Partnership, [28]). Applying these principles, the actions of the first
defender (together with the third and fourth defenders) did not comply with the expulsion
provisions of the partnership agreement. Fairman v Scully and ors 1997 GWD 29-1942 was
followed in Scotland at any point, but that decision did not in any event absolve those
seeking to expel from giving notice and fair opportunity of a hearing in every case. In
assessing the matters in the present case, those who made the decision to expel had been
acting in a quasi-judicial capacity.
The terms of the partnership agreement
[20] Clause 11 fell to be construed strictly. As such, it plainly required all of the other
partners in the partnership to vote in favour of an expulsion under clause 11. This did not
happen. If an alternative approach to expulsion had been the intention, the agreement could
have said expressly that it could be done by a majority vote among the other partners. It
was also important to note the nature of this partnership. As a family farming partnership,
it could be anticipated at the time when it was written that all of the partners would be
family members, and the trust. In that context, it was even more understandable why one
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would need unanimity before someone was expelled. The procedure for expulsion of a
partner is set down by clause 11, not by Clause 9. But even if clause 9 was in play, the
procedure adopted by the first defender did not comply with it. There was no vote taken of
the partners. There was no opportunity for either the trust or the pursuer to vote on the
proposed expulsion. They were not even told that such a vote was taking place. The
pursuer was not provided with an opportunity to make his representations in relation to the
proposed expulsion before any such vote. Only if there is default in achieving unanimity
can one turn to consider a majority vote.
The involvement of the trust
[21] The trustees of the trust did not express any view as to the proposed expulsion and,
as noted, were not even given notice of the proposed vote on expulsion. The fact that some
people who happened to be trustees voted on it in a different capacity was neither here nor
there. There was nothing before the court as to how the trust comes to a decision. In the
normal course of events, a body of trustees is to be given an opportunity to discuss and
determine what approach is to be taken.
Natural justice
[22] There was nothing in the point made by counsel for the first defender about a lack of
fair notice in relation to submissions on this matter. The rules of natural justice assist the
court in a proper construction of the partnership provisions and that was the basis upon
which the points were taken. The factual averments gave absolutely clear notice of the acts
and omissions relied upon. Given that the partners would be acting in a quasi -judicial
capacity in determining whether or not to expel the pursuer, it was necessary for this
determination to take place in accordance with the rules of natural justice. This required the
pursuer both to be made aware that there was a vote to be held on his potential expulsion, to
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be provided with an explanation of the grounds upon which his expulsion was sought, and
to be given an opportunity to present his position as to his potential expulsion and the
grounds on which it was sought. When a person is given the opportunity to explain his
position, that may persuade some others to adopt a different approach. Fairness was also
part of the requirement to act in the utmost good faith.
[23] Further, no properly independent vote had been cast in relation to the issue of
expulsion of the pursuer by either the third or fourth defender. They had simply acted in
accordance with the wishes of the first defender and on the basis of the facts presented to
them by him, rather than on the full factual picture. In such circumstances, there had been
no proper determination of the proposed expulsion. The purported vote had not taken
place on a fair and proper basis. Other partners being provided with wording and asked to
send it back was not a true choice. In terms of clause 11, a decision was taken on material
with a sanction being imposed. There was an assessment and determination of the civil
rights of the pursuer. The consequences of expulsion would include ceasing to have any
entitlement to partnership income and having the monies in the capital account paid back
over 96 months. The decision was a quasi-judicial act.
Inferences to be drawn
[24] The first defender had taken active steps to conceal the true reasons behind the
purported expulsion of the pursuer and the manner in which it was carried out, in
particular, by failing to produce the e-mail of 28 October 2017. The third and fourth
defenders were guided in their decision to expel the pursuer by the first defender. The
manner in which the evidence of the first defender was given was evasive and incomplete as
to the critical events at about the time of the purported expulsion. The court should
properly regard the absence of the full email evidence as being indicative of there being (a)
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an ulterior motive for the purported expulsion which was not being disclosed, and (b) a
significant level of control being exercised by the first defender over the votes of the third
and fourth defenders. The first defender had not provided the court with a full or frank
picture of the grounds upon which he sought to indicate to the third and fourth defenders
that the expulsion should take place. In these circumstances, it was appropriate for the court
to reach the view that the expulsion of the pursuer had taken place for reasons collateral to
those stated in the notice of expulsion. These included the general falling out between the
pursuer and the first defender and the ongoing dispute in relation to rental income. The
court should conclude that the email of 28 October 2017 was likely to contain collateral
reasons for the expulsion and could demonstrate that the position that the third and fourth
defenders reached was not on an impartial basis. If no independent assessment was made
by the third and fourth defenders, that too would invalidate the proposed expulsion. That
had occurred. On the evidence, they had been provided with the wording for expulsion that
they both sent back, which was not indicative of them applying their own minds to this
situation on an independent basis. They were not given the full picture about the
circumstances underlying the withdrawal of the monies.
[25] Prior to the first defender becoming a partner, the partnership had agreed that the
pursuer would receive the net income generated by cottages on the farm as part of his
pension. The first defender had stopped the pursuer from receiving these monies. He had
no proper basis for doing so. He had no intention to reinstate payment of these monies. The
first defender’s desire to expel the pursuer as a partner in the partnership was driven, at
least to a material extent, by the fact that his relationship with his father had collapsed as a
result of the rental dispute. The inference that this was the case fell strongly to be drawn
from the failure on the part of the first defender to produce the full correspondence passing
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between himself and his aunt and uncle in relation to the proposed expulsion. The decision
to expel had, in fact, been taken by the first defender and accepted by the third and fourth
defenders before the purported votes on the proposed expulsion were cast by the third and
fourth defenders. The withdrawal by the pursuer of monies from the partnership account
was driven by frustration on his part that he was not being permitted by the first defender to
draw his monies from the partnership and that his access to the rental monies had been
stopped. These factors were not drawn to the attention of the third and fourth defenders (or
otherwise considered by them) as part of the process leading to them casting their purported
votes to expel the pursuer as a partner.
Submissions for the first defender
Relevant legal principles
[26] It was accepted that the terms of the partnership agreement dealing with expulsion
fall to be strictly construed (Miller, Partnership (2nd ed. p187). Subject to the fair notice point
made below, it was accepted that where partners are a body determining whether or not to
expel a partner, a failure to (i) give the person under threat of expulsion intimation of the
grounds; and (ii) an opportunity to make representations, is a breach of natural justice.
However, the converse was also true: where the partners are not a body determining
whether or not to expel but merely instigating a process which might result in a
determination by a further adjudicator (such as an arbitrator), these rules of natural justice
Encyclopaedia upon which the pursuer relied was based upon Fairman v Scully but in that
case the court actually made no determination as to the application of the rules of natural
justice, the defender having conceded their application. In any event, the agreement in that
case made clear that a quasi-judicial function was to be exercised. Moreover, there was no
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provision for a further adjudication of any dispute. The current editor of Lindley & Banks on
Partnership, (20th ed., at para 10-145) did not consider it appropriate to import the principle
audi alteram partem into expulsion provisions. In Green v Howell the partner who served the
notice was in no sense acting in quasi-judicial capacity. Rather, he was simply asserting
something; a breach of the partnership contract.
The terms of the partnership agreement
[27] The pursuer’s actions portrayed a total disregard of his duties to the partnership,
including to act in good faith. A majority of the partners reached a decision that they
wished to expel the pursuer. They were entitled to reach that decision. The pursuer was
entitled to challenge the substance of the decision at arbitration (although the first defender
was content for that issue to be litigated). Absent a substantive defect, the partners (acting
by their majority in terms of clause 9) were entitled to expel the pursuer. It was open to the
partners to communicate their decision in relation to the expulsion in writing. Properly
construed, the partnership agreement in its terms did not provide for a mandatory right to
be heard before any decision is taken. The right to resolution of any decision lay in the
arbitration provisions of clause 19. In email exchanges amongst them, the first defender, the
third defender and the fourth defender indicated their votes to expel the pursuer. That
sufficed to authorise the first defender to issue the notice of expulsion. The pursuer was
fully aware that the factual basis of his expulsion was the unauthorised instruction of the
withdrawal of funds. The fact this was a family partnership made no difference; fall-outs
occur in a family business context. It was readily apparent why a majority-vote provision
would be a sensible thing to put into the partnership agreement. The partners were entitled
to reach a decision to expel the pursuer in terms of clause 11(b) in respect of the breach of
clause 10(a)) and 11(f)) of the agreement.
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The involvement of the trust
[28] The trust is governed by a majority of the trustees. A majority of the people who
were trustees had indicated their intention to expel the pursuer from the partnership. The
emails from the third and fourth defender did not express in what capacity they were voting
and it could reasonably be inferred that they voted in all capacities they held. The trust
being entitled to act by its majority, the trust had in fact been consulted regarding the
pursuer’s expulsion, even if it had not taken steps to reach its own decision. In any event,
standing the earlier majority votes of the partners having been cast, a further determination
on the part of the trust was superfluous and unnecessary.
Natural justice
[29] The pursuer’s substantive plea was directed to invalidity, pled as caused by
procedural defects in terms of the contractual requirements. At no time had the question of
natural justice been raised. Senior counsel for the pursuer described it as a legal issue, but in
that case one would have expected to see it in a plea-in-law. There was a joint statement of
issues, which made no reference to natural justice. It was accepted that the factual basis for
the natural justice argument was averred by the pursuer. However, the pursuer had failed
to plead a case addressed specifically to the application of the rules of natural justice or the
absence of consideration of any minority view of the partners. While these matters could be
addressed by counsel for the first defender, they ought not to be considered in the absence
of fair notice. The pursuer’s case also fell to be considered on its weaker alternative. The
pursuer having founded on an alternative of no meeting having been held, any submission
in regard to the pursuer not having been an opportunity to vote was irrelevant. In any
event, the pursuer’s case based upon natural justice failed. The other partners did not
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perform a quasi-judicial function. Arbitration provided the mechanism whereby any quasi-
judicial determination would take place.
[30] Absent the application of the rules of natural justice, there was no requirement for a
meeting or any right for the pursuer to make representations. In any event, all of the
relevant correspondence had been copied between the first defender, the pursuer and the
third and fourth defenders. They were all aware of the full factual background. The
pursuer was offered the opportunity to explain what he did and why he did it. He gave
responses by email. The fact that the first defender did not seek that the case be taken to
arbitration was irrelevant. The judicial function was therefore for the court. There was a
clear distinction between making a decision and acting in a quasi-judicial capacity. The
decision could be quasi-judicial if there was no reference in the partnership agreement to
arbitration.
Inferences to be drawn
[31] The third and fourth defender each gave clear evidence that their decisions to expel
the pursuer were as a result of him having emptied the partnership’s bank account. The
third defender indicated in particular her concern arising from personal knowledge of a
bank foreclosing upon an acquaintance in similar circumstances. Whilst the first defender
referred to an email of 28 October 2017 in his statement, his evidence should be taken as
being that he mis-spoke on that point. It was to be noted that no attempt was made by the
pursuer to recover this email at any stage. The evidence of the third and fourth defenders
was that they had acted independently. No basis existed for the inferences sought to be
drawn. The first defender put a proposal to the third and fourth defender. It was not
disputed that he may have given them a form of words in the event that they reached a
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decision to expel the pursuer. The fourth defender said in evidence that in the event that
they were not voting for expulsion they simply wouldn’t rely on the wording given.
[32] It was accepted that it is invalid to expel a partner for an ulterior motive (Miller
p 506). However, such motive must be demonstrable. It was not sufficient for a party to
infer such a motive from the existence of an alternative potential motivation. The existence
of an alternative motive, without proof that this was the true motive behind any expulsion,
could not reasonably restrain a partner from exercising a right to expel where a proper
motive existed. An expulsion will not be struck down merely because it happened to fit in
with the continuing partners wish to be rid of the expelled partner (Lindley & Banks on
Partnership, (20th ed., at 10-141). The grounds of expulsion were clearly understood from the
notice of expulsion to relate to the pursuer’s actions in withdrawing funds. In any event,
there was no provision requiring reasons for expulsion to be provided (Green v Howell, at
510). There was no proper basis to infer that the first, third or fourth defenders had other
motivations. The suggestion put in cross-examination that the first defender was motivated
by a desire to retain the pursuer’s capital was flatly denied by the first defender. In fact, the
partnership agreement provides for repayment of his capital upon expulsion, thereby
triggering repayment. No witness presented any evidence of any motivation to remove the
pursuer from the partnership for any reason other than his detrimental actions in leaving the
partnership without funds. The first defender in seeking the views of the third and fourth
defenders necessarily required to communicate with them. The fact of that communication
could not have itself found an allegation of an ulterior motive, not least in the face of a
blatant and readily apparent justification of expulsion.
[33] In relation to the conclusion for interdict, there was no basis presented for a
reasonable apprehension that there has been any holding out or representation to third
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parties. There was nothing before the court to suggest any reasonable apprehension that in
the event the expulsion notice is struck down the first defender would do anything other
than comply with that. There was no basis for a permanent interdict.
Decision and reasons
Relevant legal principles
[34] The two cases cited by senior counsel for the pursuer (Barrs v British Wool Marketing
Board; Inland Revenue v Barrs) demonstrate the principles of fairness and the rules of natural
justice but do not deal expressly with expulsion from a partnership. The textbooks referred
to by the parties, Miller, The Law of Partnership in Scotland (2nd ed, at 508-511) and Lindley and
Banks on Partnership (20th ed, 10-140-10-144) provide a helpful and detailed examination of
the principles and the authorities. The passage referred to in the Stair Memorial Encyclopaedia
relies largely upon Fairman v Scully, which I discuss below. Unfortunately, as these works
demonstrate, when the case law is analysed the application of the rules of natural justice in
the context of expulsion of a partner is unclear.
[35] In Blisset v Daniel (1853) 10 Hare 493 the rules of natural justice were held to apply to
where Romer J made the following observations (at 418):
“And undoubtedly, to my mind, it is essential that partners exercising a power of
this kind should before they do so, and peremptorily exclude a co-partner and
advertise that co-partner's exclusion, give him an opportunity of knowing before
they serve the notice what the cause of complaint is, so that at any rate he may have
an opportunity of explaining and, if possible, satisfying them that no good cause of
complaint exists. I think partners are not entitled to spring a notice of dissolution on
their co-partner without the slightest preliminary warning being given to him, and
without calling his attention in the slightest degree to any alleged cause of complaint,
and without giving him the slightest opportunity of meeting the case which is
alleged against him. Now, that is what the defendants did in this case.”
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[36] But there is also authority to the contrary. Green v Howell is commonly viewed as a
leading decision on this issue. At first instance, Neville J accepted that the rules of natural
justice can apply to expulsion from a partnership but concluded that they did not apply in
the case before him. He appeared to found strongly on the presence of the arbitration clause
in the partnership agreement, stating (at 500):
“I have been referred to Blisset v Daniel and many other cases, in which it has been
held, and the principle has been laid down in the widest possible terms over and
over again, that where a question of this kind—a question of expulsion—has to be
determined either by the other party or by members of a committee, or by a majority
of the partners, or by any other domestic tribunal constituted by agreement between
the parties, that discretion cannot be exercised unless and until the accused party has
had the opportunity of laying his case before the tribunal which has to judge him
and giving them the opportunity of coming to a just conclusion. I think that
principle is clear beyond the possibility of dispute, founded in natural justice, and
established, I was going to say by innumerable, but certainly by numerous decisions.
But it does not appear to me that those authorities have any bearing upon the case
before me. Here it is not for either party to decide whether he is entitled to expel his
partner from the partnership or not. He is only given the power to put certain
proceedings into train whereby it shall ultimately be decided by the proper tribunal.”
Neville J then declined to follow what had been said by Romer J in Barnes v Youngs, even
though the facts were similar. In the Court of Appeal, Cozens Hardy MR agreed with
Neville J and said (at 504) that the person who gave the notice was “so to speak, the moving
party, the litigating party, the person who was starting proceedings which would ultimately
lead to a proper adjudication on the rights of the parties”. Buckley LJ said (at 510) that the
plaintiff had merely asserted that there was a breach of duty by the other partner. It was for
the arbitrator, and if not then the court, to try that matter and make the judicial
determination. He added (at 512) that the plaintiff had taken “a certain step which set in
motion a certain course of procedure upon which the defendant had every opportunity of
asserting that the plaintiff was wrong”. Both judges rejected the views expressed in Barnes v
Youngs. Cozens Hardy MR also said that Blisset v Daniel was entirely distinguishable on the
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ground indicated by Sir George Jessel in Russell v Russell. The relevant passage in Russell
where Blisset v Daniel was distinguished appears to be this (at 479-480):
“There the Vice-Chancellor was of opinion that even in that limited case, where it
was only inter se as regards the partners themselves, yet, if the reason, as far as the
other partners were concerned, was misconduct, they ought to give the partner
sought to be expelled an opportunity of explaining his alleged misconduct. How
that case applies to the case of a single partner I do not well understand. In the case
of several partners it may well be that it is a thing to be considered, but if it is a single
partner it is plain that neither Blisset v Daniel nor Wood v. Woad has any application,
because the moment you give the power to a single partner in terms which shew that
he is to be sole judge for himself, not to acquire a benefit, but to dissolve the
partnership, then he may exercise that discretion capriciously, and there is no
obligation upon him to act as a tribunal, or to state the grounds on which he decides
for himself.”
However, that emphasis on the distinction between several partners deciding on expulsion
and a single partner doing so, leaves open the question of why the Court of Appeal in Green
v Howell rejected the position taken in Barnes v Youngs where the notice of expulsion was on
behalf of more than one of the partners. The partnership agreement in Barnes v Youngs also
contained an arbitration clause similar to that in Green v Howell which conceivably could
have been a factor behind the reasoning of the appeal court judges in rejecting the position
in Barnes v Youngs, although that is not stated by either of them. But importantly each of the
appeal court judges in Green v Howell who explained their views also made reference to the
fact that if the issue was not taken to arbitration, the court would determine the question of
whether expulsion was justified. So, the presence of the clause allowing the issue to be
determined by arbitration, despite repeated reference to it in the judgments at first instance
an on appeal, appears actually to be of no real consequence.
[37] Thus, the key differences in the facts in the leading cases include that some involve
simply two partners, one seeking to expel the other, and contain comments which might
conceivably be taken to differentiate those circumstances from cases involving more than
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two partners (Russell v Russell; Blisset v Daniel). Arguably, where there are only two
partners, expulsion by notice from one partner can take place without the other being heard
(Russell v Russell) because it is akin to dissolution, which may be done arbitrarily. Cases
such as Green v Howell could be viewed as really involving dissolution rather than
expulsion, although there is of course a degree of overlap between these concepts. On that
analysis, if one could distinguish the two-partner dissolution cases, the approach in Barnes v
Youngs to expulsion may be argued to be correct. Further, there may be circumstances in
which exclusive personal advantage is being sought by those seeking to expel, rather than
them acting in good faith and in the interests of the partnership (Blisset v Daniel) and that
can invalidate the expulsion. Also, the court hearing the matter may have determined (after
trial) that the expulsion was plainly justified, for example because of a flagrant breach of
duty by the partner, and in that context comes to deal with what might then be regarded as
the minor issue of whether he had the right to be heard before he could be expelled (Green v
Howell; Peyton v Mindham [1972] 1 WLR 8).
[38] Ultimately, however, these factors do not suffice to allow Green v Howell to be
distinguished in the present case. The main distinction drawn in that case is between
circumstances in which those in favour of expulsion simply assert that misconduct
warranting expulsion has occurred and, on the other hand, where they have to determine
(or judge) whether or not they are entitled to expel (as occurred in Wood v Woad (1874) LR 9
Exch 190). This approach focuses the issue of whether or not the decision to expel is a quasi-
judicial act. In most cases, that will be determined by the language in the relevant provision.
For example, in Wood v Woad (which involved a decision by a committee of a mutual
insurance society to expel a member), the ground was
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“that if the committee shall at any time deem the conduct of any member suspicious,
or that such member is for any other reason unworthy of remaining in this society,
they shall have full power to exclude such member.”
The word “deem” was referred in Russell v Russell as having different meanings, including
to adjudge or decide. Green v Howell effectively states that if no purported adjudication or
determination requires to be made and what is said to justify the expulsion can be viewed as
an assertion, then the rules of natural justice do not apply. This understanding of the
decision fits with what Neuberger J (as he then was) said in Mullins v Laughton and Others
[2003] Ch. 250, [2003] 2 WLR 1006 (at [95]): “… at least in general, a partner need not be
given an opportunity to explain his conduct or to argue his corner before he is expelled: see
at 478) that the audi alteram partem principle, as a rule of natural justice, applies when the
other partners are “invested with authority to adjudicate upon matters having civil
consequences for individuals”
Proudman J found (at [52]) that an expulsion was unjustified when “there was no prior
notice or opportunity to make representations before an unbiased tribunal”. However, that
issue arose in the context of an unfair prejudice claim involving a limited liability
partnership. Moreover, Green v Howell was not cited to the court. The issue is also
discussed briefly in the Joint Consultation Paper on Partnership Law, issued by the Law
Commission (Consultation Paper No 159) and the Scottish Law Commission (Discussion
Paper No 111) on 31 July 2000. It notes (at para 13.6, footnote 7) under reference to Barnes v
Youngs, Green v Howell and Kerr v Morris [1987] Ch 90 at 111, that there is doubt in English
law whether, beyond the duty to exercise the power in good faith, the rules of natural justice
apply to expulsion clauses in partnership agreements. It then states that “In Scotland the
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rules of natural justice apply to the exercise of a contractual power of expulsion in a
partnership or any other voluntary association”, referring to Fairman v Scully and added that
“Lord Hamilton, though not required to reach a decision on the matter, agreed with the
concession of the parties that the rules of natural justice applied”. However, in Fairman v
Scully Lord Hamilton did not reach any view as to whether the submission on behalf of the
pursuer in that case that the rules of natural justice applied, based on most of the English
cases cited above, should be sustained. Rather, quite understandably, he expressly stated
that in light of the concession made on behalf of the defender, there was no need to examine
the principles which determine when those rules do or do not apply. Fairman v Scully may
in any event be viewed as falling within the category of adjudicating and determining the
entitlement to expel. The relevant clause in the partnership agreement in that case referred
to any partner “considered” to have been guilty of professional misconduct or “considered”
to have brought himself or the business into disrepute.
[40] Accordingly, leaving aside the various nuances about expulsion and dissolution, and
whether different principles apply where there are more than two partners involved, the
distinction drawn is between, on the one hand, provisions in the partnership agreement
which do not result in those who expel exercising a quasi-judicial function and, on the other
hand, provisions which do involve that function. Green v Howell can be taken as meaning
that if the provision allows expulsion as a result of a breach of duty or a breach of the
agreement, and the notice of expulsion making that assertion is challenged, the matter falls
to be determined by the court or an arbitrator. If the provision is that the other partners
have to decide whether they are entitled to exercise the power to expel, and hence to
determine the rights of the partner who is proposed to be expelled, that is a quasi-judicial
function.
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Application of the principles
[41] On behalf of the pursuer, it was submitted that the exercise carried out by those who
decided to expel him was a plain exercise of a quasi-judicial function, as there was an
assessment of whether there had been a breach (including of clause 11(f) which concerns
acting in good faith). The other partners also required, it was argued, to determine what
sanction would be appropriate and whether expulsion would be appropriate. However, it
could be said that there is no material difference between the factual circumstances and the
provisions in the agreement relating to the grounds of expulsion in the present case and
those in Green v Howell. In that case, the plaintiff had been told in the notice of expulsion
that he had breached some or all of seven clauses in the agreement, had committed a
flagrant breach of his duties as a partner and had acted contrary to good faith. One of the
key issues for me, therefore, is whether I should properly regard Green v Howell as
persuasive authority for the proposition that in circumstances such as the present case the
rules of natural justice do not apply.
[42] In my opinion, it is clear from the terms of clause 11 that a condition for expulsion
must be met: “… in any of these events, the other partners may expel the partner
concerned”. Thus, one of the listed events must be determined to have happened. That was
a matter for consideration and decision. Similarly, “may expel” indicates that it is an
exercise of discretion. Unlike the position in Green v Scully these were matters which “the
other partners” required to reach conclusions upon. Clause 9 reinforces the point that this is
a decision: it permits a vote by a majority inter alia “where any decision requires to be taken”
and indeed the first defender relies upon that in respect of the decision to expel. I therefore
conclude that the provisions of the partnership agreement did confer a quasi-judicial role on
the other partners when considering and deciding upon whether to expel. While actions of
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parties after their contract has been entered into are irrelevant to the construction of the
provisions, the notice of expulsion demonstrates what was done. It states: “having
considered the matter, the partners of D V Rennie & Co have decided to expel you”. It also
makes reference to the reason being that the pursuer had acted contrary to the provisions in
the partnership agreement “including but not limited to clause 10(a) and 11(f)”. Such a
decision is expressly stated to have involved consideration of the matter, which must
include the facts and the terms of these provisions. There was therefore a determination of
the entitlement to expel. It could be suggested that the facts in Green v Howell are consistent
with the plaintiff there having considered and decided on whether he was entitled to expel
(or in fact dissolve); he plainly reached a view that, in light of what had occurred and the
terms of the partnership agreement, he was entitled to expel. Whether that case properly
involved a mere assertion is therefore perhaps open to argument.
Interpretation of the partnership agreement
[43] Clause 11 has to be read in the context of the whole of the agreement, including
clause 9 which, as noted earlier, contains the important expression “in default of
unanimity”. It is only in those circumstances that a majority vote can suffice. Historically,
that expression has been used in a number of situations. Its meaning is clear: in order to
identify whether or not there is a default of unanimous agreement, there must be steps taken
to ascertain from all partners what their position is on the matter to be decided upon. These
steps will allow determination of whether or not there is unanimity. Plainly, in at least the
vast majority of situations, if not all, the person whose expulsion is being considered will not
agree to or vote in favour of his own expulsion, so that unanimity will not be possible.
However, that does not avoid the need to identify that person’s position. Nor does it allow
those in favour of expulsion to ignore another partner (in this case, the trust) and deny it of
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notice or the right to vote. Clause 9 also refers to “votes” which again indicates obtaining
the views of each partner. Bearing in mind that the provision for expulsion is to be given a
strict construction, the reference to “the other partners” must mean that all of the other
partners (including the trust) have been consulted, and hence given notice of the proposed
expulsion. I do not accept the pursuer’s position that in this regard clause 11 effectively
supersedes clause 9 and requires all of the other partners to vote in favour of expulsion;
rather, it interacts with clause 9 and so allows a majority decision, as long as proper notice is
given to all partners.
[44] Accordingly, it is clear from these provisions that all partners (including the trust
and the pursuer) required to be advised of the proposal for expulsion. That did not happen.
In addition, as a matter of construction there is a need to decide upon the breaches, and for
that purpose all of the other partners need to know the basis for the allegations of breach
including the particular provisions alleged to be breached. Communication of that
information was not established in evidence. The procedure for expulsion was therefore not
complied with. On the submission for the first defender based on the weaker alternative
rule, I do not regard that as well founded. Properly understood, the pursuer did not make
alternative and inconsistent averments on the procedural irregularities, but averred that
several had occurred.
The involvement of the trust
[45] For the reasons I have given, clause 9 of the partnership agreement required that the
trust should have been contacted, and the trustees should then (according to whatever
procedures are required by the constitution of the trust) have reached their view on the
position of the trust on the matter of expulsion. That is so even where, as here, it is likely
that the majority of the trustees would vote in the same way as they did in the decision to
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expel. Trustees have a duty to act in the interests of the trust, to be reflected in their votes
on the position of the trust.
Natural justice
[46] On the first defender’s contentions regarding a lack of fair notice about the natural
justice issue, there is some force in the point that it ought to have been the subject of a plea-
in-law. However, its relevance is, as was submitted for the pursuer, linked to the
construction and application of the terms of the partnership agreement. Moreover, the
factual basis for the issue was the subject of clear averment on behalf of the pursuer.
Perhaps more importantly, counsel for the first defender, to his credit, did not suggest that
he had been taken by surprise by the submissions on this issue, to the extent of being
prejudiced or unable to respond; on the contrary, he responded in full and clear terms,
including under reference to the authorities. I therefore reject the first defender’s position
that this issue should not be considered.
[47] For the reasons I have given, having regard to the proper interpretation of the terms
of the partnership agreement, a quasi-judicial function was exercised and so the rules of
natural justice applied. These included the need to give the pursuer fair notice of the
grounds for his proposed expulsion and the right to be heard prior to any decision being
made. It is true that the pursuer did not ultimately insist upon his position that the factual
basis for his expulsion was not established. However, the right to be heard has as its
purpose that it may result in a different decision being taken. The pursuer did send emails
which set out his position on the withdrawal of funds, but this is not the same as being able
to state his position on whether or not specific clauses had been breached or expulsion
should follow. No fair notice of the proposed expulsion was given. The rules of natural
justice were therefore breached.
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Inferences to be drawn
[48] The first defender made express reference in his witness statement to having sent an
email on 28 October 2017 to the third and fourth defenders. This was echoed by the fourth
defender, in her witness statement. Where any other specific email is identified in the
witness statements, the number of that document in the joint bundle of productions is given.
That is not done for the email of 28 October 2017, which was not in fact produced. The first
defender’s position on it was equivocal. He appeared to accept that it existed but also
expressed doubt on that point. It is of concern that the matter of whether this email exists
was not checked by or on behalf of the first defender prior to him giving evidence, and it
may well be correct that if such an email does exist it contains information which the first
defender does not wish to disclose. However, inferences can only go so far and it would be
speculation for me to conclude, for example, that the email must have indicated that the first
defender cajoled or pressurised the third and fourth defenders into doing what he wanted.
Their evidence did not support that position. I am also unable to infer that this email would
have disclosed an ulterior motive, or that there is any other ground for concluding that there
was such a motive. The existence of other tensions or disputes between the parties is of no
moment if the grounds for expulsion existed. The fact that the third and fourth defenders
followed the wording put forward by the first defender is of no real significance, given that I
accept their evidence that they made their own decisions. What I am able to infer from their
evidence, and that of the first defender, is that he did not give notice of the specific matters
upon which they were to decide. For that reason also, having regard to the meaning of the
terms of the partnership agreement and the implicit requirement for such information to be
given, the procedure which gave rise to the notice of expulsion does not comply with the
terms of the agreement.
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[49] In relation to the conclusion for interdict, it proceeds on the footing that there is a
reasonable apprehension that the first defender may represent that the pursuer has been
expelled, even if the court decides to reduce the notice of expulsion. The basis for that
position was not established. I therefore do not grant the conclusion for interdict.
Disposal
[50] For the reasons given, the procedure adopted in relation to expulsion of the pursuer
did not comply with the terms of the partnership agreement or with the rules of natural
justice. Accordingly, I shall repel the first defender’s pleas-in-law, sustain the first plea-in-
law for the pursuer and grant decree of reduction of the notice of expulsion, reserving in the
meantime all questions of expenses.