United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR M DUGGAN (of Counsel) Instructed by: Mr M Bower 55 Hotham Road London SW15 1QW
For the Respondent	MR M O'CONNOR (Representative) Instructed by: First Assist Group - Employment Services Division Marshall's Court Marshall's Road Sutton


 


THE HONOURABLE MR JUSTICE KEITH

1. Carol Stevens and Richard Marc worked for Hughes Hooker & Co, a firm of solicitors ("the Firm"). They presented complaints of unfair dismissal, wrongful dismissal, breach of contract, unlawful deduction from pay and non-payment of redundancy pay. They named as the respondents to their complaints (a) the Firm and (b) Jack Bielecki and Michael Bower, who they said were the partners in the Firm. An Employment Tribunal held at Bury St Edmunds was required to decide two preliminary issues. Those preliminary issues related to who Mrs Stevens and Mr Marc were employed by, and what was the effective date of the termination of their employment. The Tribunal found that they "were dismissed by [Mr Bielecki and Mr Bower] in partnership together as [Hughes Hooker & Co] by notice given on 8 March 2001 expiring [on] 30 March 2001". Mr Bower now appeals against those findings.
2. In short, it is said that the Tribunal erred in its approach to the question whether Mr Bower was a partner in the Firm, and whether, even if he was not, he had allowed himself to be held out as being a partner in the Firm. Further, it is said that if Mr Bower was, or had allowed himself to be held out as, a partner in the Firm, the Firm had been dissolved on 6 March 2001, and the employment of Mrs Stevens and Mr Marc had ended on that date. The relevance of the effective date of termination was that the originating applications of Mrs Stevens and Mr Marc were not presented until 27 June 2001, and would not have been presented in time if their employment had ended on 6 March 2001.
3. The Tribunal set out its findings of fact at some length, but it is necessary for us to highlight only some of them. Mr Bielecki was admitted as a solicitor in 1985. At the end of 1985 he became a partner in the Firm. In October 1993 his only remaining partner died, and from then on Mr Bielecki was the sole proprietor of the Firm. In the course of his career Mr Bielecki had what the Tribunal described as a number of "brushes with the regulatory legal establishment". The Tribunal found that that had been common knowledge within the Firm, and that Mr Bower, who joined the firm as an assistant solicitor in May 1995, "could not have remained ignorant of the character, credentials and mode of operation of Mr Bielecki".
4. In July 1997 Mr Bielecki purported to "dissolve" the Firm, and to form in its place a limited company to handle marine insurance claims. Shortly afterwards, Mr Bielecki changed his mind. The Firm was "revived," and on 24 September 1997 Mr Bower became what the Tribunal described as a "partner" in the Firm with Mr Bielecki and his stepdaughter Kirsty Scott under a partnership deed which was not produced to the Tribunal, but which according to a judgment given in bankruptcy proceedings against Mr Bielecki subsequently described Mr Bower and Ms Scott as "salaried partners". Ms Scott retired as a partner in June 1998.
5. On 8 September 1999, Mr Bielecki and Mr Bower concluded an agreement which purported to effect the sale of the Firm's practice by Mr Bielecki to Mr Bower. Clause 2 of a collateral agreement between Mr Bielecki and Mr Bower shows that the disposal of the practice to Mr Bower was to meet the requirements of the Law Society. Other clauses show that Mr Bower's stewardship of the practice was only temporary. Thus, by clause 7 Mr Bower acknowledged that he held the practice "on trust" for Mr Bielecki until such time as the Law Society approved Mr Bielecki's reinstatement as a partner in the Firm, and clause 5 recorded Mr Bielecki's confirmation that he would continue to be "solely responsible" for all debts, liabilities and obligations of the Firm.
6. In December 1999, a deed relating to what was described as "the partnership of Hughes Hooker & Co" was entered into between Mr Bielecki, Mr Bower and Mr Duncan Francies. That was the last operative document governing the relationship of the "partners" of the Firm with each other, and was for that reason the document which had to be closely examined to see whether the Firm was indeed a partnership and whether Mr Bower was indeed a partner in it. The Tribunal did not refer to any specific clauses in the deed, though it said that it had "been referred to particular clauses in the deed…reflecting limited status bestowed upon Mr Francies and Mr Bower (notably in matters relating to salaries and remuneration of partners, fee earners and staff, in which Mr Bielecki reserved absolute, sole discretion)". In addition, the Tribunal spoke of the "wide ranging indemnities which the deed secures in favour of Mr Bower and Mr Francies from Mr Bielecki in respect of partnership liabilities". Moreover, the Tribunal said, in paragraph 26 of its extended reasons:

"…it is also worth noting that its provisions, on their face, provide for genuine participation by Mr Bower and Mr Francies in management decisions – see for example clause 9 'meetings and voting'. Although Mr Bielecki effectively reserved a veto on matters of substance and, as stated, sole discretion in all matters relating to salaries and remuneration, the partnership deed does not in terms deny responsibility to Mr Bower and Mr Francies in employment matters generally."

7. In the summer of 2000, Mr Bower decided to resign from "the partnership". The December 1999 deed required him to give three month's notice of his resignation. In his letter of resignation dated 3 July 2000, he requested Mr Bielecki to abridge that time, but Mr Bielecki refused. Although Mr Bower's notice of resignation would have taken effect on 3 October 2000, the Tribunal found that he continued to work in the practice after that date, and that he had, by implication, either withdrawn his notice of resignation or suspended its operative effect. For his part, on 26 October 2000, Mr Francies gave three month's notice of his resignation.
8. It is unnecessary to set out in detail the Tribunal's findings as to what happened thereafter. All that needs to be said is that the Tribunal found that Mr Bower did not sever his connection with the Firm until the Firm closed down on 30 March 2001. There is no challenge to that finding. The crucial issue is what the nature of that connection was. Was the Firm a partnership of which Mr Bower continued to be a partner until March 2001, or was Mr Bielecki during that period the sole proprietor of the Firm with Mr Bower an employee of the Firm? It should also be said that the Tribunal found that even if the Firm had not been a partnership of which Mr Bower continued to be a partner until March 2001, the Firm, acting through Mr Bielecki, at all times held Mr Bower out to the Law Society, to the Office for the Supervision of Solicitors, to the Firm's dwindling workforce, and to the public as large, as a partner in the Firm, and that at no time had Mr Bower objected to being portrayed to outsiders as a partner in the Firm. There was ample evidence to support that finding of fact, and that finding is not challenged on the appeal. That also makes it unnecessary for us to set out in this judgment much of the history which the Tribunal related in its extended reasons.
9. These, then, were the primary facts which the Tribunal found, and against the background of these primary facts the Tribunal made (or should be treated as having made) three critical findings:

(1) that the Firm was a partnership, of which Mr Bower continued to be a partner until March 2001;

(2) that even if the Firm was not a partnership, of which Mr Bower continued to be a partner until March 2001, the holding out of Mr Bower as a partner in the Firm, without objection from him, prevented Mr Bower from successfully asserting that he had not been a partner in the firm; and

(3) that the Firm's employees were employed by the partners in the Firm.

10. The first and second of those findings are challenged on this appeal. The basis of the challenge to the second finding is that if Mr Bower was to be prevented from successfully asserting that he had not been a member of the Firm, which would have been an application of the legal doctrine of estoppel, it had been necessary for Mrs Stevens and Mr Marc to prove that they had relied on the fact that he had been held out to be a partner of the Firm without objection from him. The Tribunal dealt with that argument in paragraph 65 of its extended reasons as follows:

"…we do not regard [Mrs Stevens and Mr Marc] as carrying any onus to demonstrate…positive acceptance by them of Mr Bower as holding himself out as partner. It seems to us that once employed by [the Firm] (as incontrovertibly they were), Mrs Stevens and Mr Marc are entitled to call Mr Bower their employer once he is shown to have been an actual or ostensible partner in that firm. Indeed, we think it incumbent upon Mr Bower to show that, despite being held out as a partner (and accordingly even if for present purposes he was not a 'true' partner), [Mrs Stevens and Mr Marc] nonetheless acknowledged that he was not a partner for the purposes of liability as employer. We simply find no evidence to that effect. We are not impressed by Mr Bower pointing to incidents of the employment relationship in which he did not personally operate the levers of control to detach or extricate himself from collective liability as a partner in the employing firm."

It is not contended by Mr Michael Duggan for Mr Bower that the mere acknowledgement that Mr Bower was not a partner in the Firm would have been insufficient to defeat the defence of estoppel. In other words, it is not contended that what had to be established was not merely that Mrs Stevens and Mr Marc knew that Mr Bower was not a partner in the Firm, but also that they would not have remained employees of the Firm had they known that he was not a partner in the Firm. The criticism of the Tribunal is that it reversed the burden of proof. Instead of requiring Mrs Stevens and Mr Marc to prove that they had not known that Mr Bower was not a partner in the Firm, the Tribunal required Mr Bower to prove that they had known that he was not a partner in the Firm.

11. The argument that the Tribunal erred in its assessment of where the burden of proof lay is based on the decision of the Court of Appeal in Nationwide Building Society v Lewis [1998] 2 WLR 915, a case which was not referred to the Tribunal. The issue which the court had to decide was stated by Peter Gibson LJ at p.917C-D as follows:

"Can a salaried partner, who is in truth only an employee of a firm and allows his name to go on the firm's notepaper in a way which does not differentiate between him and the true principal or partners and so is held out to be a partner in that firm, be held liable to another, who has dealt with that firm, for the negligence or breach of contract by it in the absence of direct evidence of actual reliance by that other on the holding-out?"

Peter Gibson LJ's answer to that question was "yes", but that did not mean that the burden of proving reliance was not on the person to whom the holding-out was made. At p.922H-923B Peter Gibson LJ said:

"[The plaintiff's Counsel] submitted that it would make the doctrine of holding out wholly artificial and unworkable if a person claiming an estoppel had to prove that he actually relied on the holding out. I do not accept this. It does not seem to be to be impractical or unjust for the law to require a person claiming an estoppel to have to prove in a partnership context what he would have to prove in other contexts. Given that reliance is a necessary requirement, it is not obvious that there should be a presumption in favour of the person who claims reliance and is in a better position to know whether he did rely on the holding-out and who should therefore be able to prove it. The person held out, who is not in fact a partner, may well have difficulty in proving the negative, that the other person did not rely on the holding-out. Of course, there may be circumstances from which it would be appropriate for the court to infer that there was reliance on a holding-out. As is stated in Spencer Bower and Turner on Estoppel by Representation 3^rd ed. (1977), pp. 114-115:

'Though on questions of fact the onus will be upon the representee, it may happen that the probability of inducement from a given set of facts is so great, or in other words the materiality is so plain and palpable, as to justify a finding of the inducement itself merely from the circumstantial context;…but it must be remembered that the inference so made is one of fact and not of law'."

We do not have to decide whether the Tribunal erred in law in relation to its second finding if we find that the Tribunal did not err in law in relation to its first finding; and it is therefore to its first finding that we now turn.

12. The December 1999 deed made Mr Bower what is generally called "a salaried partner". Clause 6.2 of the deed provided that Mr Bower was to "be entitled to a fixed share up to a maximum of £60,000 drawn monthly in arrears." But because the clause did not identify what he was to be entitled to a fixed share of, whether profits or fees or otherwise, the clause should be treated as the equivalent of a salary of £60,000 a year. That "salary" was not dependent on the size of the profits (or the losses) of the Firm. Clause 6.3 of the deed provided that Mr Bower was not to "be liable to contribute to the capital of the partnership," and he was ultimately not liable for the Firm's debts either, since by clause 2 of the deed Mr Bielecki agreed to indemnify him

"…against all costs, claims, damages, demands and expenses whatsoever and howsoever arising out of the conduct and management of [the Firm] incurred prior to and after the date of the commencement of the Partnership."

In addition, Mr Bower did not own any of the Firm's assets. Clause 5 of the deed provided that the fixed assets were owned by a limited company (in which only Mr Bielecki had an interest) and "cash, unpaid bills delivered and work-in-progress" were the sole property of Mr Bielecki.

13. However, the status of a "salaried partner" was considered by Megarry J (as he then was) in Stekel v Ellice [1973] 1 WLR 191 at p.199G-H. He said:

"It seems to me impossible to say that as a matter of law a salaried partner is or is not necessarily a partner in the true sense. He may or not be a partner, depending on the facts. What must be done, I think, is to look at the substance of the relationship between the parties; and there is ample authority for saying that the question whether or not there is a partnership depends on what the true relationship is, and not on any mere label attached to that relationship. A relationship that is plainly not a partnership is no more made into a partnership by calling it one than a relationship which is plainly a partnership is prevented from being one by a clause negativing partnership: see, for example, Lindley on Partnership, 13^th ed. (1971), p.66."

Having examined that relationship, Megarry J concluded that the plaintiff in that case had entered a partnership with the defendants, even though he was described as a "salaried partner".

14. Accordingly, the critical question for the Tribunal was whether, looking at the December 1999 deed as a whole, and not giving undue weight to the clauses in the deed which enabled Mr Bower to be characterised as a salaried partner, the relationship between Mr Bielecki and Mr Bower was that of partners – in other words, in business together, albeit with Mr Bielecki taking the risk of the business proving unprofitable and getting the rewards if the business proved profitable – or as employer and employee – in other words, with the business being that of Mr Bielecki and with Mr Bower working in that business for Mr Bielecki.
15. In our judgment, that was the question which the Tribunal addressed. It is true that the Tribunal did not specifically refer to each and every provision in the December 1999 deed; but it had referred to the effect of the provisions of the deed in paragraph 26 of its extended reasons. Nor do we think that in the critical paragraph in its extended reasons, paragraph 62, the Tribunal confused the enquiry which it had to make for the purposes of making its first finding, with the state of Mrs Stevens' and Mr Marc's knowledge, which it had to address for the purpose of making its second finding. In paragraph 62 of its extended reasons, the Tribunal referred to Stekel v Ellice and said that the case related to whether:

"…a partnership existed between two individuals in dispute as to the nature of their business relationship after it broke down. The case examines factors determining whether a 'salaried partner' necessarily was or was not a partner 'in the true sense'. The judgment in any event rules that the answer to that question requires analysis of the substance of the relationship between the parties, dependant on the facts of the relationship rather than the label attached to it."

The Tribunal's answer to that question was as follows:

"…we consider on the facts that the relationship between Mr Bower and Mr Bielecki was for most purposes (although not for all purposes – for example in respect of Inland Revenue matters) one of 'true' partnership. Notwithstanding the impoverished status of Mr Bower (and Mr Francies) under the partnership deed of December 1999, an objective reading of that document, it seems to us, leads inescapably to the conclusion that it created that which it purports to create – a partnership."

16. In our view, the real question which this appeal raises is whether it was open to the Tribunal to reach that conclusion and whether it gave sufficient reasons for that conclusion. We have already quoted what the Tribunal said in paragraph 26 of its extended reasons. The reference in paragraph 26 to "genuine participation by Mr Bower…in management decisions" was a reference, in our view, to clause 9.2A of the December 1999 deed which provided:

"All matters relating to the management and conduct of the affairs of the Partnership except in connection with remuneration shall be decided by a majority of the Partners except that the following matters shall require a unanimous resolution of all the Partners:

9.2.1 the borrowing or lending of any sum;

9.2.2 the giving of any guarantee or undertaking;

9.2.3 the opening of any new branch office;

9.2.4 the sale of any of the Partnership premises;

9.2.5 alteration of the bank mandate;

9.2.6 the introduction into the Partnership of a new Partner (whether profit sharing, salaried or otherwise);

9.2.7 any amendment of this Agreement."

In addition, the provisions in clause 9.2 (partnership meetings) and clauses 9.3 and 9.4 (equal voting rights) support the contention that the deed contemplated that Mr Bower would genuinely participate in management decisions with the exception of the salaries of the partners, fee earners and staff, which clause 9.5 provided were to remain the sole province of Mr Bielecki. So too did the fact that the obligations and restrictions imposed by clauses 12, 13 and 14 applied to Mr Bielecki as much as they applied to Mr Bower.

17. In our judgment, when clauses 2, 5, 6.2, 6.3 and 9.5 (which are the clauses on which Mr Bower relies) are set against the clauses in the deed relating to Mr Bower's genuine participation in management decisions, it is not possible to characterise as perverse the Tribunal's implicit conclusion that Mr Bielecki and Mr Bower were in business together, albeit with Mr Bielecki taking the risk that the business might prove unprofitable and the rewards if it proved profitable. The passage which we have quoted from paragraph 26 of the extended reasons is a sufficient explanation of how the Tribunal reached that conclusion. It follows that there are no grounds for setting aside the Tribunal's finding that the Firm was a partnership of which Mr Bower continued to be a partner until March 2001, and it is therefore unnecessary for us to consider whether the Tribunal erred in law in reaching the second finding to which we have referred.
18. We turn to the effective date of the termination of the employment of Mrs Stevens and Mr Marc. It was common ground that the effective date of termination was 30 March 2001 when the Firm closed down, unless the consequence in law of the events of 6 March 2001 caused their employment to end on that date. What happened on 6 March 2001 was that the Solicitors Disciplinary Tribunal ordered that Mr Bielecki be struck off the roll of solicitors. That raises two questions. First, did that result in the partnership between Mr Bielecki and Mr Bower being dissolved on 6 March 2001? Secondly, if so, did the dissolution of the partnership on 6 March 2001 mean that that was the effective date of the termination of Mrs Stevens' and Mr Marc's contracts of employment?
19. Section 34 of the Partnership Act 1890 provides:

"Dissolution by illegality of partnership

A partnership is in every case dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership."

In Hudgell Yeates & Co v Watson [1978] QB 451, a partner in a firm of solicitors accidentally failed to renew his practicing certificate, thus rendering himself unqualified. Since a partnership between a solicitor and an unqualified person was, as the law then stood, prohibited by section 39 of the Solicitors Act 1974, the partnership was held by the Court of Appeal to have become illegal and to have been automatically dissolved. Such a partnership would still be illegal now because, although section 39 of the Solicitors Act 1974 has been repealed, rule 7(6)(a) of the Solicitors Practice Rules 1990 ("the 1990 Rules") prohibits a solicitor from entering into partnership with any person other than a solicitor, a registered foreign lawyer or a recognised body. Mr Bielecki did not come within any of these categories. Since the 1990 Rules have the force of subordinate legislation (see Mohammed v Alaga & Co [2000] 1 WLR 1815), it follows that the striking off of Mr Bielecki from the roll of solicitors on 6 March 2001 meant that his partnership with Mr Bower after 6 March 2001 would have been illegal, and it was therefore dissolved by the operation of section 34 of the Partnership Act 1890 on that date.

20. Mr Duggan did not contend that Mrs Stevens and Mr Marc were not employed by Mr Bower between 6 March and 30 March. They were employed by him between those dates but no longer by him in his capacity as a partner in the Firm because the partnership had been dissolved, but in some other capacity, best described perhaps as in his personal capacity. The point which Mr Duggan takes is that their employment by Mr Bower in that capacity between 6 March and 30 March was under a different contract of employment, and by virtue of section 218(5) of the Employment Rights Act 1996, that employment was not continuous.
21. Section 218(5) provides:

"If there is a change in the partners, personal representatives or trustees who employ any person -

(a) the employee's period of employment at the time of the change counts as a period of employment with the partners, personal representatives or trustees after the change, and

(b) the change does not break the continuity of the period of employment."

No difficulty arises if the change in the partnership is such that a partnership still exists. But what if the change in the partnership is such that a partnership no longer exists, as will happen when a partner in a two-partner firm leaves the partnership through retirement, death or otherwise? Here the cases have not spoken with one voice. In Harold Fielding Ltd v Mansi [1974] ICR 347, the National Industrial Relations Court had to decide whether the applicant could bring himself within the predecessor of section 218(5), namely paragraph 9(5) of the Schedule to the Contracts of Employment Act 1972, which was in virtually identical terms to section 218(5). At p.351E, Sir John Donaldson said:

"In our judgment he cannot do so for two reasons. The first is that where one of two partners leaves the partnership, there are no partners, only a sole proprietor, after the change. Paragraph 9(5) does not cover this situation although perhaps it should."

22. A different view was taken by the Employment Appeal Tribunal in Jeetle v Elster [1985] ICR 389. There the Employment Appeal Tribunal was considering paragraph 17(5) of schedule 30 to the Employment Protection (Consolidation) Act 1978, which was the successor to paragraph 9(5) of the Schedule to the Contracts of Employment Act 1972 and the immediate predecessor of section 218(5) of the Employment Rights Act 1996, again in virtually identical language. At p.400E-H Beldam J said:

"…if it were necessary for us to decide whether there was continuity of employment under paragraph 17(5), we would have concluded that the first reason given by Sir John Donaldson in …Mansi…was, as Lord McDonald said [in Allen & Sons v Coventry [1980] ICR 9], not strictly necessary for the purpose of the decision in that case. Looked at as a whole, paragraph 17(5) is quite clearly intended to be a comprehensive provision to cover changes in the composition of those who comprise an 'employer' in cases of partnership, personal representatives or trustees. We think there is no reason for taking the view that the legislature intended different considerations to apply to partners from those applying to personal representatives or trustees. It is only because the word 'partner' has the particular attribute of 'sharing with another' that the observations of Sir John Donaldson have point. It is permissible, where the context so allows, to construe words in the plural as including the singular. The clear indication, we think, of sub-paragraph (5) is that any change in the partners (which might include, for example, the retirement of one of two partners) is not to break the continuity of the period of employment. Where the sub-paragraph says 'shall count as a period of employment with the partners' what is meant is 'with the partners or any one of them who was previously the employer in his capacity of partner in the organisation, trade or business, as the case may be.' So we would have declined to follow the observations in …Mansi…"

For our part, we prefer the approach in Elster to that of Mansi. It gives effect to the rationale underlying section 218(5) which is to preserve continuity of employment where the membership of a partnership changes. We do not think that Parliament intended that the consequence of partnership changes should be any different if a partnership of two persons becomes a sole proprietorship, simply because one of the two partners left. Since the continuity of the employment of Mrs Stevens and Mr Marc by Mr Bower, albeit under different contracts of employment, was preserved, it follows that the effective date of termination, for the purpose of their statutory rights, was 30 March 2001.

23. For these reasons, therefore, we conclude that the Tribunal did not err in the findings which it made on the two preliminary issues which it had to decide, and accordingly this appeal must be dismissed.

(After further argument)

24. We propose to give Mr Bower permission to appeal on the effect of section 218(5) of the Employment Rights Act 1996 when a partnership involving two partners is dissolved, but we are not inclined to give permission to appeal on what we have described in our judgment as the Tribunal's conclusion on the first finding. The reason is because upon our analysis the issue has been whether or not the Tribunal's evaluation of the effect of the deed was perverse. We do not think that it was, and we do not think that Mr Bower has a reasonable prospect of success in arguing before the Court of Appeal that that finding was perverse.