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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Hammonds (A Firm) v Danilunas & Ors  EWHC 216 (Ch) (13 February 2009)
Cite as:  EWHC 216 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| HAMMONDS (A FIRM)
|- and -
|(1) M DANILUNAS
(2) JOHN DEACON
(3) MARK HILTON
(4) JONATHAN HOSIE
(5) DAVID JONES
(6) JONATHAN MOORE
(7) MARK NEWCOMBE
(8) GERARD O'NEIL
(9) SIMON PALMER
(10) DERMOT PRESTON
(11) NIGEL PROCTOR
(12) PHILIP REES
(13) MARTIN THOMAS
Mr Charles Flint QC and Mr Andrew George (instructed by Messrs Addleshaw Goddard) for the 1st,2nd,3rd,4th,9th,13th, & 14th Defendants
Mr Ian Croxford QC and Mr Andrew Mold (instructed by Messrs Aaron and Partners) for the 5th Defendant
Hearing dates: 25th, 26th, & 27th November 2008
Crown Copyright ©
Mr Justice Warren :
a. The first is a preliminary issue ordered by Briggs J on 4 June 2008.
b. The second is Hammonds' application for summary judgment or strike out of certain parts of the Defence of the Addleshaw Defendants. There is no similar application in respect of Mr Jones' Defence since he does not allege prejudice in the way that the Addleshaw Defendants do.
The Preliminary Issue
"Whether on a true construction of clause 16.2 of [the UK Partnership Deed as described below] and/or as a matter of law the Partnership Accounts to which that clause refers are, at the expiration of the period specified in the last sentence thereof, binding on all persons who were partners of the Partnership at any time during the accounting year covered by those Partnership Accounts including persons who have since the commencement of such accounting year ceased to be partners in the Partnership."
a. The first is a Deed of Partnership dating from 30 July 2000. It has been amended from time to time. The document on the basis of which the matters before me have been presented contains amendments up to 9 December 2004. This document is the governing instrument of the Hammonds UK partnership. I will refer to it as "the UK Partnership Deed".
b. The second is what is described as an overriding world-wide deed dated 30 June 2002. I shall refer to it as "the OWW Deed". In essence, there are a number of partnerships in different jurisdictions which are all part of the Hammonds stable. They have a number of partners in common with the UK partnership but each has local partners who are not partners in the UK partnership. The OWW Deed provides for a pooling of the profits of each partnership and for distribution of the total profits.
c. Although these are separate agreements, the UK Partnership Deed is, as will become apparent, expressly made subject in material respects to the OWW Deed. The definitions in the OWW Deed cross-refer to the definitions in the partnership deeds, including the UK Partnership Deed, of the various firms which are bound by the OWW Deed. Although it may be wrong simply to construe the UK Partnership Deed and the OWW Deed as one, there can be no doubt that the meaning of one at least informs the meaning of the other.
The UK Partnership Deed
a. Budget: this is the budgeted profit and loss account for the Partnership adopted for any Partnership Year. This is of relevance to the ascertainment of permitted drawings on account of profit share.
b. Partnership: this is "the partnership constituted by this Deed". As we will see, the UK Partnership contains conventional provisions for partners to leave and join the firm. But death or departure does not determine the Partnership as between the other Partners. An English partnership is not, of course, a legal entity. Rather partnership is "the relation which subsists between persons carrying on business in common with a view to profit": see section 1 Partnership Act 1890. Similarly the Partnership is not a legal entity but is the enduring relationship between the individuals who, from time to time, are partners carrying on business together. Thus, where a partner leaves the Partnership, the ongoing relationship between the continuing partners remains within the definition of "Partnership"; and likewise when a new partner joins, the new relationship between the continuing partners and the new partner falls within that definition.
c. Partner: this means an Equity Partner and (unless the context otherwise requires) any Fixed Share Equity Partner and any Junior Equity Partner. It is necessary only to consider the definition of Equity Partner to understand the definition of Partner; Equity Partner is "any person who is appointed an equity partner of the Partnership" and whose share is determined in accordance with certain principles set out in Clauses 7.2, 7.3 and Schedule 2. Thus an Equity Partner as defined is, as one might expect, an equity partner (those words in lower case being given their ordinary, undefined, meaning as understood in partnership law). There is nothing expressly stated in the definition of Partner or Equity Partner which tells us that an individual who ceases to be a partner in the ordinary sense of that word ceases to be a person who remains within the definition of Partner or Equity Partner. However, it is clear, in my view, from a reading of the UK Partnership Deed as a whole, that an individual who ceases to be a partner in that sense also ceases to be a Partner as defined. That is shown, for instance, by the following definition of Partners (in the plural).
d. Partners: means "each of the signatories to this Deed and such other persons as shall become Partners during the subsistence of the Partnership for so long as in each case any such person remains a Partner in the Partnership". Perhaps slightly oddly the word "Partners" is used in the definition of "Partners", but I think it is clear that it is there being used as the plural of the word Partner as separately defined. It is as if the definition of Partners had used the words "any other person who shall become a Partner" rather than "such other persons as shall become Partners".
e. Outgoing Partner: "any Partner who: (i) has died; (ii) has retired, or resigned; or (iii) is deemed to have resigned, or who has been expelled as a Partner…..".
f. A Consultant is a person invited to become a consultant to the firm under Clause 23. This is of relevance in the present case because certain classes of Outgoing Partner become Consultants and thus become entitled to certain remuneration. Mr Jones, in particular, became a Consultant when he left the Partnership.
g. Succession Date: "the day following the date of (i) death (ii) retirement, or resignation or (iii) deemed resignation, or expulsion of a Partner…".
h. Continuing Partners: "all the Partners at the Succession Date (other than (i) an Outgoing Partner or Partners….)". The words in parenthesis are unnecessary since on the Succession Date, an Outgoing Partner will no longer fall within the definition of Partner. They were quite possibly included for the avoidance of doubt, but they might, on the contrary, be taken as suggesting that an Outgoing Partner is indeed still to be regarded as a Partner (at least for some purposes) but is excluded from being a Continuing Partner.
i. Partnership Business: "the business and profession of Solicitors and registered foreign lawyers carried on by the Partners pursuant to this Deed".
j. Partnership Year: the year 1 May to 30 April or such other period as the Partners adopt as the appropriate accounting period for the Partnership Business.
k. Partnership Accounts: the profit and loss account of the Partnership for each Partnership Year. One sees in these last three definitions a correlation between the Partnership over a period of time and the (probably fluctuating) body of persons, the Partners, carrying on the business over that time.
l. Partners' Meeting: as one might expect, this is a meeting of the Partners. It is, however, not any old meeting of the Partners, but a "formal meeting of the Partners held in accordance with the provisions of Clause 9.1 or 9.2". I will come to those provisions in due course. It would appear, reading this definition in isolation, that a meeting which some of the current Partners were not entitled to attend but which certain former Partners were entitled to attend, could not be within the definition.
m. Partnership Board: the committee constituted under Clause 12, as to which see paragraphs 17 and 18 below.
n. Profits: the Profits of the Partnership for each Partnership Year as determined pursuant to Clause 7.1. It is important to note that this definition of Profits contains within it the period over which the profit is to be ascertained. It is important because the UK Partnership Deed provides for the sharing of profit according to a system under which points are awarded to each Partner for a Partnership Year. The Profit is thus the basis of the sharing of profit although what is actually shared is "Net Profit" as defined. For the effect of Clause 7.1 (and also Clauses 7.2 and 7.3), see paragraphs 11 and 12 below.
o. Net Profits: the amount of the Profits (ie for a Partnership Year) to be divided between the Partners in accordance with Clause 7.2 and 7.3.
a. To manage and control the Partnership and its finances.
b. To determine the matters reserved for the Partnership Board as set out in Schedule 8. Included in Schedule 8 are
i. Setting the parameters for the Budget and finalising and approving the Budget on an annual basis.
ii. Approval of half yearly and year end results of the Partnership and Approval of the annual Partnership Accounts.
"16. PARTNERSHIP ACCOUNTS
16.1 The Partnership Accounts of the Partnership in respect of each Partnership Year shall be made up annually and audited as at the close of business on the last day of such Partnership Year.
16.2 A copy of the Partnership Accounts shall be delivered to each of the Partners after the same have been audited. All objections (if any) to such Partnership Accounts shall be stated in writing by the Partner concerned to the Senior Partner within 10 days of his receiving such copy and (subject to any objections so stated) such Partnership Accounts shall at the expiration of such period (or earlier if agreed by all the Partners) be binding on all the Partners. Any objections to such Partnership Accounts by a Partner shall be duly considered by the Partnership Board and its decision thereon shall be binding on such Partner unless within 5 days of receiving such decision he shall notify in writing to the Senior Partner his desire to refer the matters in dispute to a Partners' Meeting in which event the determination of the Partners by Ordinary Resolution shall be binding on all Partners."
a. Under paragraph 3.1.1, a capital sum (payable within 30 days) equal to the aggregate of (i) Fixed Capital (ii) the balance on the Outgoing Partner's Deferred Drawings Account (excluding a tax reserve).
b. Under paragraph 3.1.2, any undrawn balance on the Current Account of the Outgoing Partner for the Partnership Year in which the Succession Date occurs and from any previous Partnership Year. This undrawn balance (it seems in respect of both the year of departure and earlier years) is payable on the earlier of (i) 30 days after the date on which the same has been determined and (ii) 180 days from the end of the Partnership Year in which the Succession Date occurs. I comment further on this in a moment.
The OWW Deed
a. Management Accounts means the monthly management accounts of each Partnership from time to time.
b. Partnership means any of the partnerships, one of those being the UK partnership of HSE Hammonds, in turn defined as "the partnership constituted by [the UK Partnership Deed]".
c. Total Profit Share means the total profit share of each Partner (ie any profit sharing partner in any of the Partnerships) from all Partnerships – some individuals were partners in more than one of the Partnerships.
"adopting the accounting policies and principles of [Hammonds] as adopted in the Partnership Accounts of [Hammonds] for the year ended 30 April 2002 (as from time to time amended, varied or modified by [Hammonds]) or where no accounting policy or principle has been applied in accordance with UK GAAP".
"The Net Profits disclosed by such Partnership Accounts will be aggregated to produce the Combined Net Profit and the Average Net Sterling Profit Per Partnership Point will be determined."
Nothing turns on the meaning of Average Net Sterling Profit Per Partnership Point which is not, so far as I can see, defined anywhere in the OWW Deed.
"It is not for a party who relies upon the words actually used to establish that those words effect a sensible commercial purpose. It should be assumed, as a starting point, that the parties understood the purpose which was effected by the words they used; and that they used those words because, to them, that was a sensible commercial purpose. Before the Court can introduce words which the parties have not used, it is necessary to be satisfied (i) that the words actually used produce a result which is so commercially nonsensical that the parties could not have intended it, and (ii) that they did intend some other commercial purpose which can be identified with confidence. If, and only if, those two conditions are satisfied, is it open to the court to introduce words which the parties have not used in order to construe the agreement. It is then permissible to do so because, if those conditions are satisfied, the additional words give to the agreement or clause the meaning which the parties must have intended.
a. The first is that the Partners' Meeting does indeed mean a meeting of the individuals who are Partners at the time when the objection comes to be considered by the meeting. But if, as Mr Steinfeld has to contend, the words "all Partners" at the end of Clause 16.2 refers to all of individuals who were Partners during the Partnership Year (ie including Outgoing Partners) and not just to the individuals who were Partners at the time of the Partners' Meeting, then two different sets of Partners are being identified in the same sentence. Further, where it is an Outgoing Partner who makes an objection, the Partners who are to determine the validity of the objection will not include the individual who made it and is concerned by it.
b. The second is that the Partners' Meeting is a meeting of the Partners referred to in the first sentence of Clause 16.2. The problem with that approach is that the meeting will quite probably be a meeting of individuals who would not, at any single point in time during the Partnership Year in question (or indeed ever), have constituted a Partners' Meeting as defined. This is because it is highly likely that, during the course of Partnership Year, there would be partners leaving and partners joining. There would therefore be no time during the year when all of the persons who were Partners at any time during the year were Partners at the same time.
a. Those individuals who were Partners at the close of business on the last day of the Partnership Year, an approach which might be thought to gain some support from the closing words of clause 16.1.
b. The individuals who were Partners at the time when the accounts had actually been prepared and audited and were first ready for delivery.
c. The individuals who were Partners at any time after the accounts were first ready for delivery, including incoming Partners after that time, but with the obligation to deliver such accounts to a particular individual ceasing, if that individual has become an Outgoing Partner before actual delivery has been effected.
a. The first is that the Partners' Meeting means a meeting of the individuals who are Partners at the time when the objection comes to be considered by the meeting. If the words "all Partners" at the end of Clause 16.2 refers to the Partners identified under paragraphs 60a. or b., (including Outgoing Partners who leave after the relevant time identified in those paragraphs) and not the Partners at the time of the Partners' Meeting, two different sets of Partners are being identified in the same sentence. Further, where it is an Outgoing Partner who makes an objection, the Partners who are to determine the validity of the objection will, as before, not include the individual who made it and is concerned by it. It can be argued that "all Partners" means the Partners who comprise the Partners' Meeting, but there are difficulties with that which I address when considering, in a moment, the third group identified in paragraph 60c. above.
b. The second is that the Partners' Meeting is a meeting of the Partners referred to in the first sentence of Clause 16.2. This at least avoids the difficulty which arises on Mr Steinfeld's construction since the group of individuals concerned is identified at a point of time rather than over a period of time, and is thus a group which was, at that point in time, at least capable of constituting a Partners' Meeting.
"It must be remembered that the accounts may cover a period during which an outgoing partner was a member of the firm. If such a partner is to be bound by accounts approved by the continuing partners, this should be expressly stated in the agreement. ……"
"the combined Net Profits expressed in Sterling for each Partnership Year produced by aggregating the actual Net Profits less losses (if any) of [the various partnerships including Hammonds] after appropriate adjustments for any inter-firm/company transaction."
where (again pursuant to a definition found in Clause 1.1) "Net Profits" bears the meaning ascribed to such expression in each of the various partnership agreements.
a. By Clause 10(3): The aggregate of the Net Profits disclosed by accounts which, in the case of Hammonds, are the accounts produced pursuant to Clause 16.
b. By the definitions: the aggregate of the Net Profits of each partnership.
The summary judgment/strike out application
a. That the profits of 2003/2004 had been achieved only by a decision to apply material changes to the accounting practices of previous years.
b. That by the end of April 2005, the Partnership Board had been advised that there was a risk of material misstatement of the First 2003/2004 Accounts and that in relation to the Italian partnership (accounting for 26% of the group profits) the accounting information was unreliable.
c. That by 9 May 2005, the Financial Controller had been advised that adjustments in excess of £10 million would be required to the profits shown by those Accounts.
d. That the Partnership Board had since a date, in or shortly after February 2005, planned to reverse the "beneficial changes" thus materially reducing the profits available for distribution in respect of 2003/2004.
"In the taking of accounts as between Hammonds and the Addleshaw Defendants the matters set out above are to be taken into account between the partners, so as to exonerate the Addleshaw Defendants from liability in respect of the claims made, or to reduce any liability which they might otherwise have."
"What [the Addleshaw Defendants] allege is that by failing to correct misrepresentations Peter Crossley and others acting on the direction of the Partnership Board were in breach of their duty of good faith. They then make a leap to assert that as a result the [Addleshaw Defendants] have suffered loss which they are entitled to recover from "Hammonds". For the purpose of this application it must be assumed (though highly disputed) that there was an alleged failure to correct misrepresentations. It is the leap that is untenable and neither explained nor justified in the Defence."
"5A.1 Paragraph 5A.1 apply to claims that are brought by or against two or more persons who-
(1) were partners; and
(2) carried on that partnership business within the jurisdiction,
at the time when the cause of action accrued.
5A.3 where that partnership has a name, unless it is inappropriate to do so, claims must be brought in or against the name under which that partnership carried on business at the time the cause of action accrued."
"So Hammonds in these proceedings is suing each of the Defendants as the assignee of each of the persons who were partners in the firm when such Defendant ceased to be a partner. So when the AG Ds claim that an alleged misrepresentation made to them by a partner gives rise to claims by them against "Hammonds", what they are asserting is that each of them had a claim against all of the other partners in Hammonds at the date when he/she ceased to be a partner. Such a claim, it is submitted, is an impossible one as a matter of law."
"For many purposes a corporator with whom his own corporation has dealings, or on whom it may by its agents inflict some wrong, is in the same position towards it as a stranger; except that he may have to contribute, rateably with others, towards the payment of his own claim. But here it is impossible to separate the matter of the Pursuer's claim from his status as a corporator, unless that status can be put to an end by rescinding the contract which brought him into it. His complaint is, that by means of the fraud alleged, he was induced to take upon himself the liabilities of shareholder. The loss from which he seeks to be indemnified by damages is really neither more nor less that the whole aliquot share due from him in contribution of the whole debts and liabilities of the company; and if his claim is right in principle I fail to see how the remedy founded on that principle can fall short of going to that length. But it is of the essence of the contract between the shareholders (as long as it remains unrescinded) that they should all contribute equally to the payment of all the company's debts and liabilities.
Such an action of damages as the present is really not against the corporation as an aggregate body, but is against all the members of it except one, viz., the Pursuer; it is to throw upon them the Pursuer's share of the corporate debts and liabilities. Many of those shareholders….may have come and probably did come into the company after the Pursuer had acquired his shares. They are all as innocent of the fraud as the Pursuer himself; if it were imputable to them it must, on the same principle, be imputable to the Pursuer himself so long as he remains a shareholder; and they are no more liable for any consequences of fraudulent or other wrongful acts of the company's agent than he is…."
"He was appointed by all the members operating through the committee, and in my judgment, he there-upon became the agent of each member to do reasonably carefully all those things which he was appointed to do, and in that way he came to owe a duty to each of the members to take reasonable care and to carry out his duties without negligence."
"It seems to me that it is open to the court to find that a duty of care existed where a club officer or a member of a committee takes upon himself some task which he is to perform for other members of the club in the course of which he acquires actual knowledge of circumstances which he knows gives rise to risk of injury to club members, acting as he knows they will or may be expected to act if not told of the cause of danger. I do not doubt that the nature of the relationship between members of a club will often be such that it will be impossible to find that one member has undertaken any responsibility to inspect or to inquire or to consider whether circumstances will or may give rise to a risk of injury, but there may be circumstances in which a member acquires knowledge, both of an actual danger and of the fact that, if a warning is not given, the members on whose behalf he has undertaken to perform a task will be exposed to risk of injury. In such circumstances (and it is not necessary to inquire into what in what other circumstances) it is open to a court to find that a duty of care existed and was broken."
"It is difficult to avoid the conclusion that the law has changed since Prole v Allen and Robertson v Ridley, and that the reservations of May LJ about the finding against the steward in Prole v Allen may now safely be ignored.
It seems clear that a member may owe another member a duty of care in circumstances where it is likely such a duty would not have been found by the court which decided Robertson v. Ridley. That duty may arise when responsibilities have, by the rules or otherwise, been devolved to (or assumed by) a member, particularly where the member has, in the course of carrying out his responsibilities, acquired "actual knowledge of circumstances which he knows gives rise to risk of injury to club members acting as he knows they will or may be expected to act if not told of the cause of the danger", (Jones page 27)."
"to a substantial extent, Mr Mullins can say that those ten defendants must take the consequences of leaving the question of Mr Mullins's removal to Messrs Laughton, Travers and Clements, in the same way as any principal must take the consequences of his agent".
"I can see no reason why a former partner who is treated by some or all of his co-partners in a manner which is contrary to an express and/or implied duty of good faith should not be similarly entitled to recover damages of the sort which Mr Mullins's fifth and sixth claims [loss or reputation and career disruption] involve.
…..In my judgment, it would be a most unfortunate state of affairs, and very unfair on a person in the position of Mr Mullins, if the law could afford him no redress in respect of damage which he could establish that he had suffered as a result of the way in which he was treated on and after 28 June 2002, at least in so far as that treatment was plainly in conflict with the express or implied duty of his partners to act towards him in good faith. I therefore conclude that the account should be carried out taking into account the loss of reputation and other damage, if any, which Mr Mullins can establish that he has suffered as a result of the breach of good faith on the part of his co-partners."
Should the issue be dealt with a matter of summary judgment/strike out?