Scottish Sheriff Court Decisions

SHERIFFDOM OF GLASGOW AND STRATHKELVIN AT GLASGOW

 

2015SCGLA50

CA7/14

JUDGMENT

of

SHERIFF PRINCIPAL C A L SCOTT, QC

in the cause

John Fraser Tait

Pursuer

against

 

RGM Solicitors & Others

Defenders

                                                                        

 

 

 

Glasgow, 30 June 2015.

 

The sheriff principal, having resumed consideration of the appeal, refuses same and adheres to the sheriff’s interlocutors dated 28 November 2014 and 17 December 2014; finds the defenders liable to the pursuer in the expenses of the appeal; allows an account thereof to be given in and remits same, when lodged, to the auditor of court to tax and to report thereon.

 

 

 

 

 

 

NOTE:-

 

[1]        This appeal was largely taken up with the construction to be placed upon a particular provision within a Partnership Agreement.  That provision is as follows:

 

 

“7.  Profits and Losses

 

7.1 Net profits or net losses (other than profits and losses of capital nature) shall belong to and be borne by the partners in the following shares:-

 

Partner Shares

Robert Gordon Marshall 50% in respect of all premises except 131 Church Walk, Denny, 40% in respect of the premises at 131 Church Walk, Denny.

 

Samuel Harvey Waddell 50% in respect of all premises except 131 Church Walk, Denny, 40% in respect of the premises at 131 Church Walk, Denny.

 

Thomas Edward Docherty, £38,000 per annum reviewable annually and 20% of the net profit of 131 Church Walk, Denny.

 

John Fraser Tait, £36,000 per annum reviewable annually and 20% of the net profit of the Court Department operated by John Fraser Tait which shall include such works as are deemed by the other partners to be included in the said Court Department.”

 

[2]        Ultimately, the case came before the sheriff in the context of a proof.  The pursuer, who is a solicitor, was formerly a partner with the defenders.  Following his resignation from the firm he raised an action of accounting and payment against the firm and the continuing partners.  They in turn counterclaimed for the balance allegedly due by the pursuer on his capital account and separately for the balance of a liability incurred by the firm which it was claimed he had agreed to meet.

 

[3]        The sheriff’s findings in fact and in law are set out at page 4 of his judgment.  Inter alia, he found that:

 

“1.    Upon a proper construction of clause 7.1 of the partnership agreement it provided for the pursuer to receive payment of a fixed annual sum of £36,000 irrespective of profits; and

 

3.      The partnership agreement did not provide for the pursuer to bear any of the losses of the firm.”

 

[4]        In advancing the appeal on behalf of the defenders, Mr Cowan, solicitor, helpfully provided a detailed note of his submissions.  That note has been retained in the court process.  However, the main thrust of Mr Cowan’s argument was to the effect that the construction of clause 7.1 favoured by the sheriff was wrong either because the sheriff ought to have found that the only natural and ordinary meaning of clause 7.1 was to the effect that payment to the pursuer was dependent upon the firm as a whole making “net profits” or because the sheriff had erred in his conclusion regarding what amounted to the most commercially sensible construction of clause 7.1.  The note of appeal for the defenders sets out the foregoing propositions particularly at paragraphs 1 and 2.

 

[5]        Whilst Mr Cowan made reference to various authorities in the course of his submissions, I did not understand him to argue that the sheriff had misunderstood the import of cases such as Rainy Sky SA v Kookmin Bank [2011] 1 WLR 290 or Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43.  Similarly, the various propositions which the sheriff extracted from the foregoing decisions (see page 9 in the sheriff’s judgment) were not the subject of any meaningful challenge in the course of the appeal.  Instead, Mr Cowan for a number of reasons argued that the sheriff’s approach to construction and his application of the law there anent had simply been wrong.  At the heart of the defenders’ argument lay the contention that the opening words of clause 7.1 “Net profits or net losses…shall belong to and be borne by the partners in the following shares” were clear and unambiguous.  Moreover, it was submitted that it was equally clear and unambiguous that what followed those words was intended to be read subject to them.

 

[6]        In the defenders’ submission, there was only one ordinary and natural meaning of clause 7.1.  That was to the effect that each of the four partners’ entitlement was to a share of the “net profits” of the firm. 

 

[7]        Moreover, the defenders’ submissions relied upon the argument that “shares” did not require to be expressed in percentages or fractions; they could equally be expressed as fixed sums.  Mr Cowan was at pains to address and reconcile what emerged within the appeal hearing as the “40+40+20” conundrum.  In other words, as the sheriff points out within paragraph [11] in his note, where Mr Docherty was to receive 20% of the net profit of the Denny office, that taken along with the Denny office shares allocated to Mr Marshall and Mr Waddell would, of course, represent 100% of all net profit to be attributed to that office.  The sheriff had thereby concluded that the payment of £38,000 per annum to be made to Mr Docherty could not be understood to be a share of profit because the arithmetic involved simply meant that once the percentage shares had been accounted for there was, as the sheriff put it, “nothing left to share”.

 

[8]        Mr Cowan argued that this apparent difficulty did not impact upon the contractual provision relating to the pursuer because the pursuer’s entitlement involved a share of the “net profit” of the firm as opposed to the “net profit” of the Denny premises.  He also submitted that in order for the reader to understand how the net profit of the Denny premises was to be dealt with it was necessary to read the provisions dealing with the defenders and Mr Docherty together.

 

[9]        In response to the sheriff’s observation at paragraph [12] within his note to the effect that it made no sense to have linked Mr Docherty’s 20% share to the “net profit” of the Denny premises, Mr Cowan maintained that the parties’ intention was clearly to restrict Mr Docherty’s percentage share to the premises which he was in charge of and that it was not obvious how that intention could otherwise have been achieved.

 

[10]      The pursuer’s “variable share”, as Mr Cowan described it, viz. 20%, was in respect of “the Court Department”.  Unlike the defenders’ 50% shares and Mr Docherty’s 20% share, the pursuer’s variable share was not in respect of “premises”.  There was, therefore, no need for the pursuer’s variable share to be dealt with in the same way as that of Mr Docherty.

 

[11]      Mr Cowan conceded that the foregoing observations in relation to the pursuer’s variable share did not constitute an answer to the difficulty presented by leaving the Denny premises out of account and then combining Mr Marshall and Mr Waddell’s two 50% shares together, the outcome being that nothing would be left for the pursuer.  However, Mr Cowan submitted that the reasonable reader would understand that the defenders’ 50% share were to be taken after payment of the pursuer’s fixed and variable shares.  In other words, it was contended on behalf of the defenders that the payments to the pursuer ought to be understood as being first charges on profit.

 

[12]      In relation to Mr Docherty, once again, the provision regarding payment of £38,000 was not, accepted Mr Cowan, consistent with the first line of clause 7.1.  It did not and could not relate to “net losses” of the firm.  Nevertheless, Mr Cowan argued that, in the event that the firm were to make a loss, the payment of £38,000 would simply not be made.  The 20% figure pertaining to Mr Docherty did not relate to “net losses” of the firm either but that, submitted Mr Cowan, was expressly provided for in the specific reference to “net profit of 131 Church Walk, Denny”.

 

[13]      Mr Cowan did not appear to accept that the reference in the opening words of clause 7.1 to both net profits and net losses created any difficulty for the construction supported by him.  He maintained that it did not alter the fact that it was only where the firm as a whole made “net profits” that there would be a “pot” from which to make payment.  Mr Cowan submitted that there was nothing contradictory in each partner’s entitlement being to payment from the “net profits” of the firm but with only two of the partners being liable for any “net losses”.

 

[14]      At paragraphs 25 to 29 in his written submissions, Mr Cowan argued that what appeared in clause 5 and clause 8 of the Partnership Agreement tended to support the defenders’ construction of clause 7.1 and, in particular that the payments to the pursuer fell to be made from the “net profits” of the firm.  Clause 8.2 dealt with monthly payments and specifically stated that monthly drawings (see finding in fact 11) could be delayed, suspended or reduced.  The clause also included the words “…on account of his respective share in the net profits”.  Clause 8.1 at 8.4 also referred to shares of the net profits.

 

[15]      The case of Marsh v Stacey (1963) 107 SJ 512 (referred to in Lindley & Banks on Partnership at paragraph 10-86) was founded upon by Mr Cowan.  In Marsh, the court held that a partner entitled to a “fixed salary…as a first charge on the profits…” was not entitled to be paid if the firm made a loss.  Mr Cowan submitted that, in the present case, the pursuer’s construction would require the preamble to clause 7.1 to be ignored when considering the pursuer’s entitlement to payment.

 

[16]      The Marsh case was cited in Lindley & Banks as authority for the proposition that “provided that the salaried or fixed share partner’s remuneration is stated to be payable out of profits, the court will usually be prepared to infer that it will abate if those profits are insufficient”.  It was maintained that it could not be said in relation to clause 7.1 that something had clearly gone wrong with the words or syntax used (cf. Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896).

 

[17]      Where the court was of the view that clause 7.1 did allow for two possible constructions, it was argued that the construction favoured on behalf of the defenders made commercial sense.  Mr Cowan submitted that partners were not always paid more than non-partners.  Therefore, the fact that the Partnership Agreement did not much enhance the terms upon which the pursuer had been employed was not significant.  Furthermore, the assumption of risk by a junior partner (particularly a risk which at the time may not be considered to be likely) of not being paid in return for enhanced status and longer-term prospects was not, maintained Mr Cowan, contrary to commercial sense.  The Partnership Agreement provided the pursuer with a right to be consulted in relation to the management of the firm.  That was a right to which he would not have been entitled had he remained as an employee.

 

[18]      Commercial sense required to be considered from the perspective of both parties.  It was submitted that from the perspective of the defenders it would be contrary to commercial sense for them to agree to pay the pursuer regardless of how badly the firm performed.  Mr Cowan rejected the notion espoused by the sheriff to the effect that the defenders would benefit from “a windfall were their construction to be preferred”.  He claimed it would only be “a windfall” in the sense that it would reduce the extent of the losses which they would otherwise require to bear.

 

[19]      In conclusion, it was contended on behalf of the defenders that, properly construed, clause 7.1 had the effect whereby the pursuer was only entitled to payment of his fixed and variable shares in the event of the firm making “net profits”.  For the year 2008/2009, the firm made a net loss.  The pursuer was not, therefore, entitled to any payment in terms of clause 7.1.  His claims for the unpaid balance of his fixed share (crave one) and his 20% share of the Court Department profits (crave three) should, accordingly, have failed.  Furthermore, in terms of clause 18.3 of the Partnership Agreement the pursuer was obliged to repay the debit balance on his capital account being £21,000 representing the total of the payments made to him during 2008/2009 less £1,253 being the opening balance on his capital account.  That brought out a figure of £19,747.  Mr Cowan invited the court to allow the appeal. 

 

Pursuer’s submissions

[20]      In reply, Mr Clark, for the pursuer, referred generally to the written submissions presented before the sheriff.  He maintained that the sheriff’s decision had been correct and that his application of the law had been correct.  He referred to the case of Grove Investments and stressed the need for the defenders to persuade this court that the sheriff had erred in law in some way.

 

[21]      For Mr Clark, the starting point in the argument concerned the natural and ordinary meaning of the clause under consideration.  He submitted that clause 7.1 was not clear and unambiguous not least having regard to the 40+40+20 conundrum referred to at paragraph [7] supra but also having regard to the various features mentioned by the sheriff within the discussion section of his note.

 

[22]      The fact that the sheriff, having heard proof, had benefited from having an insight into the contextual background was also emphasised on behalf of the pursuer.  That was a matter of particular significance, submitted Mr Clark, having regard to what had been said in the cases of Rainy Sky and Grove Investments. 

 

[23]      It was contended on behalf of the pursuer that the sum of £36,000 per annum referred to within clause 7.1 properly fell to be regarded as a fixed payment to be made to the pursuer irrespective of the firm’s position regarding profits.  Mr Clark pointed to paragraph [12] within the sheriff’s note and to the comparison drawn as between clause 7.1 and Mr Docherty.  Mr Clark supported the sheriff’s conclusion that it was not easy to understand the £38,000 (in Mr Docherty’s case) as representing a share of profits and that it was still more difficult to see how it might to relate to losses.

 

[24]      The court was reminded that prior to the Partnership Agreement being entered into, the pursuer benefited from a salary of £34,000 per annum (qua employee) and also benefited from a motor car provided by the firm.  The Partnership Agreement in effect brought about minimal change to the pursuer’s circumstances.  The increase to £36,000 per annum might, in itself, be accounted for by the withdrawal of the motor car arrangement and the variable allocation of 20% of the net profit from the Court Department could not be said to have greatly enhanced the pursuer’s circumstances either.

 

[25]      Therefore, Mr Clark posed the question which he submitted the sheriff had correctly confronted, viz. “Why should the pursuer have relinquished his entitlement to the payment of £34,000 per annum where any corresponding benefit was, at best, difficult to discern?”  Mr Clark maintained that the defenders’ reliance upon the passage from Lindley & Banks, at paragraph 10-86 therein, did not truly advance their cause since the passage in question merely amounted to a general commentary on modern partnership practice.  In any event, Mr Clark pointed to the following sentences from the aforementioned paragraph:

 

“The agreement should, in either case, clearly establish whether such remuneration is payable irrespective of the firm’s profitability and whether such a partner will be liable for losses and, if so, to what extent.  It is usual to deal with the latter point by means of an express indemnity.”

 

[26]      Mr Clark pointed out that, in the case of the present Partnership Agreement, none of these features had been attended to.  The same passage from Lindley also acknowledged the case of Geddes v Wallace (1820) 2 Bli. 270 in which the agreement was construed as providing for a guaranteed salary as well as an indemnity against losses.

 

[27]      As a matter of fact, the pursuer had not been required to pay any capital into the firm and, moreover, no due diligence had been effected prior to his entering the Partnership Agreement.

 

[28]      In relation to the case of Marsh, Mr Clark submitted that, quite clearly, it had been determined upon its own facts and circumstances.  In that case, the agreement made specific reference to “fixed salary…as a first charge on the profits…”  Quite obviously, no such phrase or anything similar to it featured in the present action.

 

[29]      Mr Clark commended the sheriff’s assessment of matters as it appeared within paragraph [22] in his note.  He reiterated that, on the evidence, as determined by the sheriff, there was no reason to suppose or infer that the defenders intended to avoid having to pay the pursuer if the firm ran at a loss.  They had previously committed themselves to paying the pursuer more or less the same sum whilst he was an employee.  Mr Clark argued that were the defenders’ construction of clause 7.1 to prevail, it would, indeed, result in a benefit to them constituting something in the nature of a windfall.  It was contended that the submissions advanced on behalf of the defenders ignored the reality of the contextual background in the case.

 

[30]      In considering what amounted to the most commercial construction of clause 7.1, Mr Clark submitted that the sheriff’s analysis from paragraph [19] in his note to paragraph [24] could not be faulted.  The background circumstances did, indeed, tend to support the interpretation that the pursuer was to receive payment of a fixed sum of £36,000 irrespective of profits.  As the sheriff put it, “…for a small potential gain he (the pursuer) would not merely have assumed new liabilities, he would have forfeited the security of a salary, as well as his employment rights.  If that really had been the parties’ intention then one would expect to see evidence of some form of due diligence having occurred.”

 

[31]      Mr Clark urged the court to refuse the appeal and to adhere to the sheriff’s interlocutor of 28 November 2014.

 

Discussion

[32]      Whatever one makes of the preamble to clause 7.1, its interaction with the wording which follows falls far short of creating a clause whose terms can be said to be clear and unambiguous.  It was contended on behalf of the defenders that these opening words were crucial to the construction favoured by them.  That construction embraces the proposition that the figure of £36,000 quoad the pursuer could only be paid from “net profits”.  However, for reasons alluded to within the sheriff’s note and in the course of submissions on appeal, attempts to legitimise the construction supported by the defenders simply give rise to more questions than answers.

 

[33]      For example, even before that part of the clause dealing with the pursuer is reached, net profits in respect of “all premises” belonging to the firm have been accounted for.  (The 40+40+20 conundrum).  It is, therefore, impossible for the £36,000 per annum, stipulated as being due to the pursuer, to represent a share of the firm’s “net profits” since net profits for all premises have, in terms of the clause, already been allocated.

 

[34]      In any event, I am unable to find fault with the sheriff’s approach.  I agree with his analysis at paragraph [12] in his note.  The most natural reading of clause 7.1 in so far as it concerns Mr Docherty is that he had no responsibility for losses of the firm.  I also agree with the sheriff’s conclusion, regarding the pursuer, at paragraph [13].  Applying the natural and ordinary meaning of the language of clause 7.1 and reading it as a whole, the placing of £36,000 against the pursuer’s name cannot be understood as the allocation of a share in either the profits or losses of the firm.  Moreover, the commitment to pay 20% of the net profits of the Court Department does not, to my mind, involve any obligation to bear Court Department losses or those of the firm generally.

 

[35]      I do not consider that the case of Marsh v Stacey properly supports the defenders’ position in the present case.  Marsh clearly falls to be distinguished on its own particular facts and it seems to me that Mr Cowan’s suggestion as to what “the reasonable reader” would understand from clause 7.1 carries with it the importation of words and a concept which simply do not appear in the clause itself.  In my view, a straightforward reading of clause 7.1 certainly does not throw up the proposition that the payments to the pursuer ought to be understood as being “first charges on profit”.

 

[36]      Mr Cowan’s apparent reliance upon clauses 5 and 8 in the partnership agreement similarly did not impact upon the sheriff’s consideration of the case.  The very general terms of the clause relating to Outgoings (clause 5) do not assist in the construction of clause 7.1 and the reference (within clause 5) to “the firm’s money” appears to be undefined.  There is certainly no reference to it within the definition section of the agreement.  Moreover, I did not attribute particular weight to Mr Cowan’s line of argument based upon clause 8 of the agreement.

 

[37]      The sheriff’s extrapolation of general propositions emerging from the decisions in Rainy Sky and Grove Investments was not challenged on behalf of the defenders and rightly so.  However, in terms of the contextual background relied upon by the sheriff, the pursuer’s pre-existing capacity qua employee on a salary of £34,000 per annum plus motor vehicle plus bonus (based on turnover of the Court Department) taken along with the lack of any contribution to capital and any due diligence procedure are matters of material significance.  Mr Cowan was unable to suggest otherwise.

 

[38]      When it comes to the most commercial construction of the agreement, once again, I concur with the sheriff’s approach.  For the reasons set out by the sheriff at paragraph [20], in particular, it would, indeed, have made no sense for the pursuer to have taken on the liabilities of partnership as well as the risk of unprofitability where his reward for doing so was so limited and, in reality, constituted little or no improvement upon his remuneration as an employee with the firm.  The sheriff was, in my view, correct to place weight upon the lack of evidence concerning due diligence having occurred.  As the sheriff puts it at the end of paragraph [21] in his note:

 

“It is fair to say that the benefits which the pursuer could expect to accrue were either intangible or long-term and small return if the price was the surrender of a secure salary and the right to a redundancy payment.”

 

The sheriff’s conclusion that the construction favoured by the defenders would yield up something in the nature of a windfall seems entirely apt.

 

Decision

[39]      Accordingly, I have determined that the sheriff’s interlocutors should stand.  The decernitures in terms of craves 1 and 3 flow directly from the conclusion that, as well as being the natural construction, the most commercially sensible construction of clause 7.1 is that it provides for the pursuer to receive payment of a fixed sum of £36,000 irrespective of the firm’s profitability and that the pursuer did not share in the losses of the firm.  As explained by the sheriff at paragraph [25], that conclusion supports the pursuer’s entitlement to decree in the sum of £6,000.  Paragraph [26] in the sheriff’s note explains the decerniture in the sum of £5,260.80 in terms of the third crave.

 

[40]      Of course, in advancing the grounds of appeal, Mr Cowan also endeavoured to persuade the court (on the hypothesis that the defenders’ construction of clause 7.1 was correct) that the pursuer was under an obligation to repay the debit balance on his capital account.  (See paragraph [39] in the defenders’ written submissions).  Standing the sheriff’s decision and my confirmation of that decision, it follows that the defenders’ counterclaim in the sum of £19,747 fails whilst there is no dispute that the pursuer should retain decree for payment in the sum of £23,000 in accordance with the sheriff’s decerniture under crave 2.

 

[41]      The pursuer having successfully rebutted the defenders’ appeal, it follows that he should be entitled to the expenses occasioned by the appeal procedure.