Hammonds (A Firm) v Danilunas & Ors [2009] EWHC 216 (Ch) (13 February 2009)

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Cite as: [2009] EWHC 216 (Ch)

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		Neutral Citation Number: [2009] EWHC 216 (Ch)
		Case No: HC07C01528

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

13/02/2009

B e f o r e :

MR JUSTICE WARREN
____________________

Between:

	HAMMONDS (A FIRM)	Claimant
	- 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 (14)STEPHEN TUPPER	Defendants

____________________

Mr Alan Steinfeld QC and Mr Richard Ritchie (instructed by Hammonds LLP) for the Claimant
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
____________________

HTML VERSION OF JUDGMENT
____________________

Mr Justice Warren :

Introduction

The Claimants in this action are Hammonds, a firm of solicitors. They claim against a number of former partners in the firm amounts which it is alleged were drawn in excess of their true share of profits for two years of accounts ending on 30 April 2004 and 30 April 2005. Under the terms of the relevant partnership deed, which I will come to in a moment, provision was made for drawings in respect of anticipated profits for the year. In accordance with that provision, and perfectly properly, partners, including the Defendants, drew amounts which, in the event, were considerably in excess of their respective shares of profits as shown in the accounts which were eventually prepared and which the Claimants say are binding on the Defendants. The firm has sought repayment of excess drawings on the basis of those accounts. All the relevant partners have come to terms with Hammonds other than eight of the Defendants (the other six Defendants having come to terms since the commencement of these proceedings against them).

Seven of the remaining eight Defendants since leaving Hammonds, have joined other law firms and have instructed the firm of Addleshaw Goddard for the purpose of these proceedings. I shall call them the Addleshaw Defendants. They are represented by Charles Flint QC and Andrew George. The fifth defendant, Mr David Jones, is represented by Ian Croxford QC and Andrew Mold. Hammonds are represented by Alan Steinfeld QC and Richard Ritchie.

The Addleshaw Defendants and Mr Jones maintain that they are not bound by the accounts which have been prepared by Hammonds. They say that those accounts are deficient in various ways and that they are entitled to have an account taken by the Court. Six of the Addleshaw Defendants (those other than the fourteenth defendant, Mr Tupper) also allege that misrepresentations were made to them, which were not corrected, as a result of which they say that they have been prejudiced. They say that Hammonds is now estopped from going back on the representations. Hammonds assert that certain parts of the case pleaded against them in that respect are unsustainable and should be struck out.

Subject to the claims based on misrepresentation, all of the remaining Defendants now accept, although they have not always done so, that they must repay any excess drawings, although there is disagreement about the juridical basis – restitution or implied term – on which they must do so. It is those Defendants' case, absent of any express agreement between them and Hammonds, that that excess is to be ascertained by reference to an account taken by the Court and not by reference to the allegedly defective accounts prepared by Hammonds.

Before me are two matters:

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

The preliminary issue is a pure question of construction of the partnership deed. It is whether former partners are bound by the partnership accounts which are to be prepared in accordance with that deed. The issue is formulated in this way:

"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."

In addressing that preliminary issue, there are two agreements with which I am concerned.

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

To answer the preliminary issue, which is a short point of construction, it is necessary to consider several provisions of the UK Partnership Deed, starting with the definitions. Defined terms are given the meanings assigned to them "unless the context otherwise requires". The relevant definitions are these:

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.

There are other provisions of the UK Partnership Deed which I need to mention in order to deal with the preliminary issue, although some are perhaps of marginal relevance to the narrow point of construction which arises.

Clause 4 provides for the duration of the Partnership as defined. It continues during the joint lives of the Partners or the survivors of them subject to the express provisions relating to death, retirement etc and dissolution. However, the death, retirement etc of a Partner does not determine the Partnership as between the other Partners. It is in that sense that the Partnership can be seen as a continuing entity or relationship between a fluctuating body of persons.

Clause 7 deals with the ascertainment of Profits. These, as I see it, are what are commonly referred to as gross profits. On the income side are the usual items of fees and commissions. Also included is the appropriate proportion of work in progress "determined on an accruals basis according to the accounting policies from time to time of the Partnership". One sees there one item, work in progress, which is to be dealt with in accordance with accounting policies adopted by the Partnership, not by someone else such as the Court. On the expenditure side, is firstly, "all appropriate provisions for write-offs and bad or doubtful debts". It is not said, here at least, who is to be the arbiter of appropriateness. A number of other items on this side of the account are mentioned. One of these is one type of capital cost which falls to be treated as a revenue item "for accounting purposes in accordance with the accounting policies of the Partnership or is [sic perhaps this should be "as"] otherwise agreed". This is another instance of a decision which is for the Partnership rather than for someone else. It also includes any other expenditure which the Partners shall from time to time agree as being a revenue expense of the Partnership.

Clause 7.2 and 7.3 deal respectively with the division of Net Profits for the period up to 30 April 2004 and as from 1 May 2004. Just as Profits are referable, by virtue of the definition of Profits, to the Partnership Year as the basis period for the ascertainment of profit, so too, I consider, Net Profits are also referable to the same basis period: although that is not expressly stated, it would necessarily follow if one views Net Profits as being a part of Profits. It is not entirely clear what the draftsman is using "Net Profits" to describe although I think it is probably that part of the Profits which can properly be distributed to the Partners in contrast, for instance, with being needed to meet the Partnership tax liability. That does not, unfortunately, fit perfectly with the provisions relating to drawings in respect of anticipated profits.

As will be seen in a moment, provision is made for the preparation of accounts in Clause 16. It is to be noted, however, that there is nothing in Clause 7, or in the definitions of Profit and Net Profits, which expressly provide that the profit share of a Partner or Outgoing Partner is to be ascertained by reference to the accounts prepared under Clause 16. Instead, Clause 7 provides for the division of Net Profits without dealing with the mechanics of their ascertainment. Clause 16 provides such mechanics, but it is only in relation to the persons bound by Clause 16 that the accounts prepared pursuant to Clause 16 can be seen as establishing definitively the profit share of any person.

Drawings are dealt with in Clause 8 which provides that the Partnership Board shall from time to time determine the policy which the Partnership shall adopt in relation to the withdrawal of Net Profits. The policy from 1 May 2004 is set out in Schedule 3. Schedule 3 in its detailed drafting may not be seen as perfect, but its sense is, I think, clear. It introduces the concept of "anticipated Net Profits" which for each Partner is "the apportioned part of the Net Profits of the Partnership pro rata for each month according to the Budget of the Partnership from time to time issued and revised by the Partnership Board". Since the Budget can be revised from time to time by the Partnership Board, the anticipated Net Profits can change; thus a Partner would not be able to take excessive drawings by reference to a Budget which turned out, during the course of the year, to be over-optimistic. The Partnership Board could revise the Budget and thereby reduce the anticipated Net Profits for each Partner. The Partnership Board can also determine a "Permitted Percentage". Each Partner is allowed, from time to time during the year, to draw an amount equal to the Permitted Percentage of his share of anticipated net profits. He effects that drawing from a Current Account to which the Permitted Percentage of his share of New Profits is credited. The drafting here is not crystal clear; but it seems to me that the Current Account is, in the first instance, credited with the share of anticipated Net Profits, with an adjustment being made when the actual results are known following approval of the Partnership Accounts at least so far as an individual who remains a Partner at all material times is concerned.

Another accounting item is also effected: there is credited to a Partner's Deferred Drawings Account the balance (ie 100% less the Permitted Percentage) of the Net Profits of that Partner. Since this credit will, as with the Current Account, be based initially on anticipated Net Profits, albeit by reference to a Budget which can be revised, it is possible that at the year end, a Partner has both (i) actually drawn more than his Permitted Percentage of the actual Net Profits as eventually ascertained and (ii) had credited to his Deferred Drawings Account more than the balance of his entitlement to Net Profits as eventually ascertained. Indeed, it is possible that he has actually drawn more than he is ultimately entitled to because the Permitted Percentage of his share of the anticipated Net Profits might turn out to be more than the whole of his share of actual Net Profits. Curiously, there is nothing express in Schedule 3 about making adjustments to drawings on account and credits to Current Account and Deferred Drawings Account to reflect actual results.

Clause 9 deals with meetings of Partners and explains the defined term "Partners' Meeting". The Partners are to hold a conference each year to discuss major policy; the conference is deemed to be a Partners' Meeting. The Partners "shall hold a Partners' Meeting" in a variety or circumstances, one of which is "whenever the Senior Partner and/or the Partnership Board shall so require".

Clause 12 deals with management, control and administration of the Partnership. These are vested in the Partners and, except as provided in the UK Partnership Deed, "no Partner, Local Partner, Consultant, or other person shall be entitled to participate in the same". As the individuals who make up the Partners change from time to time, so the persons in whom these functions are vested changes. Clearly this provision is focusing on a particular time and identifying the persons who exercise those functions at that time.

Clause 12.2 deals with the constitution of the Partnership Board. Nothing turns on the detail although I note that the Senior Partner and the Managing Partner are ex officio members. The functions of the Partnership Board are set out in Clause 12.2.3 and include the following:

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.

Clause 15 deals with circulation "to all Partners" of agendas and minutes of "Meetings of Partners" – whether these are the same as Partners' Meetings as defined in not clear. Were it not for the dispute which has now arisen about the meaning of Clause 16.2 to which I will come in just a moment, it would not, in practical terms, be likely that the precise meaning of this provision would fall to be considered. However, where a person ceases to be a Partner after a meeting which he has attended as a Partner but before the minutes have been prepared and circulated, a question may arise whether he is entitled, under Clause 15.1, to receive them. Similarly, the right of a person who has become a Partner after the date of the meeting to receive the minutes under Clause 15.1 may be open to question (although a new Partner may, I suppose, be entitled to see them under other provisions of the UK Partnership Deed).

Although Clause 7 deals with the meaning of Profits and Net Profits, it is not that Clause which lays down who is to carry out the task of preparing accounts to ascertain Profits and Net Profits or how an individual Partner or Outgoing Partner is to be able to question or challenge any accounts actually prepared. To the extent that this is dealt with at all in the UK Partnership Deed, it is dealt with in Clause 16, which I set out in full:

"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."

The issue between the parties is simple to state. It is the identification of the individuals who are bound by Clause 16.2 as falling with the words "all Partners" at the end of that provision. Mr Steinfeld submits that Clause 16 is binding on all the individuals who were Partners at any time during the Partnership Year in question. Mr Flint and Mr Croxford are reluctant to say precisely which individuals are bound; it is enough for their purposes to say that their clients are not bound, on the footing that they had ceased to be Partners before the relevant accounts were delivered and are not, therefore, "Partners" within the meaning of that word in the first sentence of Clause 16.2 and accordingly not within the rest of Clause 16.2 and in particular the provision for making the accounts binding. Before turning to the detailed arguments, I wish to complete my review of potentially relevant provisions of the UK Partnership Deed.

I also wish to make two preliminary observations. The first is to make the obvious point that Clause 16.1 is focusing on a particular year of account. Accounts are to be prepared for the business of the ongoing entity, the Partnership, for that year; it is a period during which the Partners may change. Each individual who was a Partner at any time during that year has an interest in the Net Profits of that year. Whether or not an Outgoing Partner is bound by such accounts, he clearly has an interest in them since, if he is satisfied with them, he will not need even to consider whether he has any route, other than Clause 16.2, to object to them. The second observation is that the responsibility for seeing that the accounts are prepared is that of the Partnership Board. That must, I consider, follow from the functions of the Partnership Board to manage and control the Partnership and its finances and to approve the annual Partnership Accounts. An individual who has ceased to be a Partner during a Partnership Year will, of course, have an interest in the contents of the accounts, but he can have no part in their preparation after he has left. That is a function of the Partnership Board which comprises Continuing Partners.

Clause 18 sets out the Partners' duties. I need refer only to Clause 18.1 which expressly states that each Partner is under an obligation of the utmost good faith to the other Partners in all matters relating to the Partnership. This is qualified in relation to the Senior Partner, the Managing Partner and the Partnership Board and other Committees. If they act in the interests of the Partnership as a whole, they shall not be considered to be in breach of duty. For instance, the UK Partnership Deed provides for action to be taken in respect of an under-performing Partner. The taking of such action may well not be in the interests of the relevant Partner whose profit-share might be reduced, but even so such action, if proper, will not be regarded as a breach of duty to that Partner.

Under Clause 21, it is provided that a new incoming Partner is to execute a deed of accession. If he does so – and he will not be admitted to the Partnership unless he does – he becomes bound by the terms of the UK Partnership Deed. A Consultant will normally be invited to attend and speak at Partners' Meetings but he is not entitled to vote and he does not count for the quorum.

Clauses 25 to 28 deal with retirement, early retirement and expulsion. Nothing turns on the detail of these provisions, save that a Partner taking early retirement under Clause 27 (such as Mr Jones) may elect to become a Consultant in which case he becomes entitled to remuneration under Schedule 7. His consultancy fee under that Schedule depends on his share of the average Net Profits over the 3 Partnership Years preceding his retirement.

Clause 29 incorporates the provisions of Schedule 5 where a Partner dies or, subject as otherwise provided in the UK Partnership Deed, where he retires, resigns or is deemed to resign, or is expelled. Schedule 5 makes a number of provisions consequential on the departure of a Partner.

First, the Outgoing Partner's share in the capital and assets (including goodwill and work in progress) and in future profits of the Partnership vests in the Continuing Partners.

Secondly, the Continuing Partners take over the debts and liabilities of the Partnership at the Succession Date with certain exceptions. Those exceptions are (i) income tax attributable to the Outgoing Partner's share of profits and (ii) any debt or liability arising from a wrongful act or omission of the Partners or their employees etc before the Succession Date and which is uninsured.

Thirdly, the Continuing Partners are to pay various amounts to the Outgoing Partner. It is clear that these amounts are intended to be in full and final settlement of the Outgoing Partners' claims in respect of his entitlement in respect of the partnership of which he was a partner, that is to the say the Partnership as it existed on the day before the Succession Date. The amounts described are these:

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.

As with Schedule 3 relating to drawings, there is nothing expressly provided here for adjustments to be made to reflect the actual Net Profits for the year in question. Take an example and consider 2 successive years, Year 1 and Year 2, of the Partnership. An Outgoing Partner leaves the Partnership during Year 2 before the Partnership Accounts for Year 1 have been finalised. Suppose those accounts are finalised during the course of Year 2 and that the Outgoing Partner accepts them as accurate. The accounts show that his Current Account had been credited with less than his share of Net Profits as disclosed. He must clearly be entitled, one way or another, to receive an amount equal to the shortfall in distributions to him. If one is to find the mechanism for this payment in Schedule 5 itself (rather than being left to the implication of a necessary term) it is to be found in paragraph 3.1.2 on the footing that the shortfall will be credited to the Outgoing Partner's Current Account. That would be consistent with the provisions of Schedule 3 which, for reasons already given, must envisage adjustments being made to Current Account to reflect a Partner's share of actual Net Profits.

So far as the Outgoing Partner's share of profits in Year 2 is concerned, the position is more complex. Ignoring difficulties of timing, it must, once again, surely be the case that an Outgoing Partner is entitled to receive his share of Net Profits attributable to the part of Year 2 during which he was a Partner. Indeed, paragraph 3.1 of Schedule 5 recognises that an Outgoing Partner retains an entitlement to a share of Net Profits in respect of the year in which he leaves. However, paragraph 3.2 avoids the need to take an account at the Succession Date, and provides, instead, that the share of Net Profits attributable to the Outgoing Partner in respect of the year of his departure is deemed to be a time-apportioned part of the Net Profits to which he would have been entitled if he had remained a Partner throughout the year. There may be a problem of timing because, in fact, the Outgoing Partner's share of Net Profits will not be known until after Partnership Accounts for the year of his departure have been prepared which may be after the 180 day period, but I do not need to deal with that.

As pointed out in the discussion of Clause 7, neither that Clause nor the definition of Profits and Net Profits expressly state that Net Profits is to be taken as the figure revealed by the accounts produced pursuant to Clause 16. Accordingly, if Mr Flint and Mr Croxford are right in saying that an Outgoing Partner is not bound by such accounts, the balance of the Net Profit to which an Outgoing Partner is entitled will be the figure ascertained in some other way (eg by an account taken by the Court or by agreement). It will be the balance as ascertained which will be credited to his Current Account and paid out to him pursuant to paragraph 3.

Schedule 5 also provides for the Outgoing Partner to deliver to the Continuing Partners any information and documents relating to the Partnership Business; he is entitled for 3 years to inspect books of account, records, letters and other documents for any period before his departure for the purpose of dealing with his financial and taxation affairs. It is odd that he is not, apparently, entitled to financial records for the period from his departure until the end of the Partnership Year since his entitlement depends on the Net Profit for the whole of that year and not just the part of the year ending on his departure. It is not easy to see why the draftsman would deliberately have adopted such a provision.

The provisions of Schedule 5 are expressed by paragraph 8.10 to be subject to the OWW Deed.

The only other provision of the UK Partnership which I need mention is Clause 44 by which the Partners acknowledge that the UK Partnership Deed is subject to the terms of the OWW Deed. In particular, any entitlement to drawings from the Partnership on account of Net Profits and any entitlement of an Outgoing Partner pursuant to Schedule 5 under the UK Partnership Deed are governed by the application of both deeds accordingly.

The OWW Deed

The OWW Deed was made on 30 June 2002 between representatives of various associated partnerships in different countries (the UK, Hong Kong, France, Germany and Italy) to regulate their relations. The Budget means, in the case of each partnership, its Budget as defined in their respective partnership deeds with the Combined Budget being the combined budget for each Partnership Year produced by aggregating the Budgets of the partnerships (and any associated firms) after appropriate adjustment for inter-firm/company transactions. There are similar corresponding definitions of Combined Budgeted Net Profit, Combined Drawings Policy, Combined Net Profit and Combined Profit and Loss Account. Current Account and Deferred Drawings Account refer to the corresponding accounts in the accounting records of each partnership. The Permitted Percentage of Drawings means, in the case of each partnership, the permitted percentage of drawing against Combined Budgeted Net Profit approved by the Partnership Boards of the partnerships

In addition, there are these definitions:

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.

Each Partnership is obliged to prepare a Budget for each Partnership Year. It is to be prepared

"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 Partnership Board of each Partnership is to agree a Combined Drawings Policy on the basis of the Combined Budgeted Net Profit for each Partnership Year. Following the determination of the Combined Net Profit after the end of the relevant Partnership Year, the entitlement of each Partner to share in the Net Profits of each Partnership is to be reviewed by reference to the Combined Net Profits. The profit share of each Partner is then ascertained and appropriate cash transfers are made between the Partnerships so that the Current Accounts of each Partner in each Partnership reflect the source of income of each Partner from each Partnership.

The OWW Deed provides, at clause 9, for the production by each Partnership of management accounts in the format adopted by Hammonds from time to time, again "adopting the accounting policies and principles used by Hammonds in the year ended 30 April 2002 (as from time to time amended, modified or varied) or where no accounting policy or principle has been applied in accordance with UK GAAP".

Each Partnership is to produce, pursuant to clause 10(1), Partnership Accounts which will be prepared on the same basis as the management accounts for Hammonds. Curiously, there does not appear to be a definition of Partnership Accounts. It is clear, I think, that it means the profit and loss account and balance sheet for the year in question; accordingly, the Partnership Accounts so far as concerns Hammonds are the same as the Partnership Accounts as defined in the UK Partnership Deed.

Clause 10(3) provides for that

"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.

Construction

I have already identified the construction for which each side contends. The general principles of construction are now well-established. I have been referred to the oft-cited and well-known passage from the speech of Lord Hoffmann in Investors Compensation Scheme v West Bromwich BS [1998] 1 WLR 896 at 913. I do not propose to add to the mass of citation by setting it out again. The search is for the meaning of the document – what the parties would reasonably have been understood to mean using the words which they have against the relevant background.

Where expressions are actually defined in a document, the expectation will be that the defined expression will carry the defined meaning. Qualifying words such as are found in the UK Partnership Deed ("unless the context otherwise requires") are not to be taken as a general licence to depart from the defined meaning to enable the court to produce a "better" meaning. In that context, Mr Croxford has referred me to the judgment of Chadwick LJ in City Alliance Ltd v Oxford Forecasting Services Ltd [2001] 1 All ER (Comm) 233 at 237 citing a passage with which I readily concur:

"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.

I do not consider that it is commercially nonsensical to reach either of the results for which the parties contend. It would make perfectly good sense for a partnership deed to provide unambiguously that partnership accounts prepared for a partnership year should be binding on all the persons who were partners at any time during that year, albeit that in such a case one might expect to find some mechanism within the deed for an outgoing partner to challenge the account. But it would also make perfectly good sense for accounts to be prepared by, and be binding only on, the continuing partners, with an outgoing partner being left to a remedy through the courts if the continuing partners were unable to satisfy any objection which the outgoing partner might have to the account prepared by them.

Mr Flint and Mr Croxford contend that clause 16.2 has a clear literal meaning which, if he is to succeed, Mr Steinfeld needs to displace. I am unable to detect the clear literal meaning which they submit is to be perceived. Accordingly, I do not consider that some particular burden lies on Mr Steinfeld to show that there is something special about the context of the UK Partnership Deed which requires some stretching of the language away from its literal meaning. What I have to do is to discover the meaning intended by the parties of the words which they have used in the context of the UK Partnership Deed as a whole.

To state the obvious, the different broad results for which each of the parties contends (ie binding or not binding on Outgoing Partners) can be reached only by giving certain words and phrases in Clause 16.2 particular different meanings. It is to my mind helpful in the exercise of discovering the meaning which the parties have attached to words and phrases to look beyond the broad result for which each party contends and to examine more generally the consequences of each construction. If a particular construction leads to an absurd, or perhaps even a surprising, consequence, it may cast some doubt on whether the parties can have intended to give the words which they have used the meaning, in context, which leads to that consequence. I therefore want to devote some time to identifying the consequences of each construction.

Mr Steinfeld identifies the Partners referred to in the first sentence of Clause 16.2 as all of the individuals who were partners in Hammonds at any time during the Partnership Year in respect of which the Partnership Accounts are being prepared. It includes Outgoing Partners departing during the Partnership Year. The Partnership Accounts must be delivered to all such Partners; Clause 16.2 does not require the accounts to be delivered to an incoming Partner who joins the Partnership after the year end, but in practice he would be able to obtain a copy by virtue of his status as a Partner at a time when those accounts are available.

If an individual has an objection to the accounts, he must state his objection in writing to the Senior Partner within 10 days of receiving a copy. That individual is "the Partner concerned" referred to in the second sentence of Clause 16.2 even if he is an Outgoing Partner; I do not consider that it can possibly be correct that an individual who is a Partner within the first sentence of clause 16.2 fails to qualify as "the Partner concerned" simply by virtue of ceasing to be a Partner after delivery of the accounts to him. Rather, the first sentence identifies a group of individuals, Mr A, Mrs B etc; and the words "the Partner concerned" is simply a reference to the individual, say Mr A, who objects to the accounts.

There is, on any construction, a difficulty with the second sentence of clause 16.2. It gives a Partner 10 days in which to object to the accounts: but that period runs only from the date when he receives the accounts. Different Partners may receive the accounts on different days; indeed, it is possible to envisage circumstances where there could be significant delay in ensuring delivery to all Partners. Since the Partner concerned may be an Outgoing Partner, it may be that his personal circumstances make communication with him difficult – he may have retired to a remote part of the world. Accordingly, there is a possibility, to put it no higher, that the period of objection could continue for considerably longer than might be anticipated in the case of a Continuing Partner in relation to whom significant delay in delivery of accounts would not be expected.

It is, however, provided that the accounts, subject to any objection, become binding on all of the Partners at the expiry of "such period". It is entirely unclear what the words "such period" are referring to in the context of a 10 day period which seems capable of having different starting dates. The explanation may be that the draftsman thought that once the accounts were available for distribution, they would in fact be delivered on each Partner at the same time, but that is speculation on my part.

Subject to any objections so stated, the accounts "shall…be binding on all the Partners". On Mr Steinfeld's construction, "all the Partners" is a reference to the same individuals as are comprised in "each of the Partners" in the first sentence of Clause 16.2, thus including an Outgoing Partner. The accounts become binding, even in the absence of objection, only after expiry of the 10 day period; accordingly, if there is delay in the receipt by a Partner of the accounts, they do not become binding on "all of the Partners" as soon as might have been expected.

Where there is an objection "by a Partner", it is to be considered by the Partnership Board. On Mr Steinfeld's construction, a Partner in this context includes an Outgoing Partner. In my judgment, that must be right once it is accepted that the Partners referred to in the first sentence are all of the individuals who have been Partners at any time during the Partnership Year. It would make no sense to allow such an Outgoing Partner to object but to allow only objections by an existing Partner to be referred to the Partnership Board.

Again there can be no doubt, in my judgment, that the reference to the Partnership Board is to the Board as constituted at the time when the objection falls to be considered and not, if different, the Board as constituted at some time during the Partnership Year in question.

The Partnership Board then reaches a decision which, subject to further reference to a Partners' Meeting, is binding on "such Partner"; that is clearly a reference to the Partner who has made the objection and who, on Mr Steinfeld's construction, can be an Outgoing Partner. Had the words "such Partner" been replaced by "him or her" there could be no doubt about this, as Mr Croxford accepts; but that, in my judgment, is precisely what the words "such Partner" mean. If the objecting Partner is dissatisfied, he must notify the Senior Partner (again clearly a reference to the person holding that office at that time) of "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".

It is these words which present difficulties on Mr Steinfeld's construction. This is because "Partners' Meeting" is a defined term; it is the formal meeting of the Partners held in accordance with Clause 9.1 or 9.2. If the Senior Partner were to convene a Partners' Meeting on a particular day, one might expect that such meeting would comprise the individuals who were the Partners on that day; it would not include Outgoing Partners. Mr Steinfeld's construction therefore leads to one of two conclusions.

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.

I turn now to the consequences of the construction for which Mr Flint and Mr Croxford contend.

As I have mentioned, Mr Flint and Mr Croxford are reluctant to identify too precisely to which individuals the Partnership Accounts have to be delivered. It is enough for their purposes to say that it cannot include any individual who is an Outgoing Partner by the end of the Partnership Year. Clearly Partnership Accounts cannot be prepared before the end of that year and cannot therefore be delivered to anyone before the end of that year. Since an Outgoing Partner is not, by definition, any longer a Partner, it cannot be, according to this argument, that the Partnership Accounts are to be delivered to such an individual.

That approach may satisfy Mr Flint and Mr Croxford. But it is by itself not very helpful as an approach to construction generally. It is clearly necessary to establish the basis on which, according to this construction, an Outgoing Partner is not a Partner to whom Partnership Accounts have to be delivered. It is only when that basis is explained that it is possible to establish the consequences of adopting that basis in the context of the UK Partnership Deed as a whole and clause 16.2 in particular. And it is only when such consequences are in turn established that it is possible to judge whether they are, on the one hand, unsurprising and sensible or, on the other hand, surprising and perhaps even absurd.

The Partners who are referred to in clause 16.2 might, consistently with the result for which Mr Flint and Mr Croxford contend, be identified in several different ways, for instance (there may be others but this sample is enough for present purposes):

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.

If it is right to identify the relevant Partners as a group of individuals who were Partners at a particular time, as in paragraphs a. and b., then a similar analysis should apply to the remainder of clause 16.2 as applies under Mr Steinfeld's construction to the group which he identifies.

Thus, the Partnership Accounts must be delivered to all the members of the relevant group. As before, clause 16.2 does not require the accounts to be delivered to an incoming Partner who joins the Partnership after the year end, or after the accounts are ready for delivery as the case may be, but in practice he would again be able to obtain a copy by virtue of his status as a Partner at a time when those accounts are available. Further, if such an individual has an objection to the accounts, he must state his objection in writing to the Senior Partner within 10 days of receiving a copy. As before, (i) that individual is "the Partner concerned" referred to in the second sentence of Clause 16.2 even if he becomes an Outgoing Partner after delivery of the accounts to him and (ii) "all the Partners" is a reference to the same individuals as are comprised in "each of the Partners" in the first sentence of Clause 16.2, thus including an individual who has become an Outgoing Partner. The analysis concerning the Partnership Board and "such Partner" is also the same.

This approach then meets precisely the same difficulties as those which arise on Mr Steinfeld's construction. The constructions suggested at paragraphs 60a. and b. above therefore lead to one of two conclusions similar to those reached in relation to Mr Steinfeld's construction.

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.

The third possible group of individuals identified in paragraph 60c. above gives a meaning to "Partners" which reflects the definition and applies it literally. According to this approach, the word "Partner" each time it appears in clause 16.2 is used to identify the individuals who fall within that definition at the various times to which clause 16.2 is referring. Thus in the first sentence, "the Partners" refers to the Partners at the time when accounts are to be delivered, that is to say any time after which the accounts are ready for delivery; a new Partner joining the Partnership some time after the moment when the accounts are first available for delivery would then be entitled to delivery when he joins, since he then becomes a Partner for the purposes of the provision.

In the second sentence, the "Partner concerned" is a reference to a Partner wishing to object to the accounts; on the approach of paragraph c., this would include a new Partner but exclude an individual who had ceased to be a Partner since receiving the accounts although, since a recipient must object within 10 days of receipt, this is likely to affect a very small number of individuals, if any. Given the ambulatory meaning being given to the words "Partner" and "Partners", it should follow that the accounts become binding on "all of the Partners"; but since this only occurs at the "expiration of such period" the difficulty identified already – arising from the fact that there are as many 10 day periods as there are different dates of delivery to different Partners – makes it almost impossible to know which individuals become bound as falling within the description "all Partners".

The provision that any objection is to be considered by the Partnership Board also gives rise to acute difficulties. The obligation of the Partnership Board to consider an objection only applies to an objection made "by a Partner"; again, given the approach which requires one to look at who is a Partner from time to time, the objection which was made by an individual who was a Partner when it was made, would cease to be one "by a Partner" as soon as that individual ceased to be a Partner with the consequence that, as soon as a Partner ceased to be a Partner and became an Outgoing Partner, the Partnership Board would no longer need to consider the objection. Further, where the Partnership Board gives a decision it is binding on the objecting Partner (assuming he remains a Partner up until the time of the decision) unless he expresses his desire to refer the matter to a Partners' Meeting. If he does so, but ceases to be a Partner prior to that meeting, he would not, on this approach, be bound because he will not be one of the individuals included in the words "all Partners" at the end of clause 16.2.

Those are some, at least, of the consequences of some of the different approaches to clause 16.2. It is impossible to think that the draftsman of the provision had the situation which now arises in mind at all for, if he had done, he would surely have addressed it directly. Instead, he has drafted the whole of clause 16 without considering the consequences of a change of the membership of the Partnership either during the Partnership Year in question or thereafter. Quite clearly, however, the provision has to be applied more widely than the limited situation where there is no change in the membership of the Partnership from the beginning of a Partnership Year until the accounts for that year have become binding, under clause 16, on all the Partners. The issue, in reality, is the meaning to be given to the words which the draftsman has used in circumstances which he has not expressly dealt with and where it is not, therefore, surprising that whatever approach is adopted, difficulties of construction arise.

Mr Flint and Mr Croxford have one particular criticism of Mr Steinfeld's construction which I mention here. Their case is that it is really quite impossible to treat the Partners' Meeting referred to at the end of clause 16.2 as a meeting of all of the individuals who were Partners at any time during the Partnership Year in question. The Partners' Meeting must be a meeting of the individuals who are Partners when the meeting takes place. Accordingly, an Outgoing Partner has no right to attend the meeting and even if he is, pursuant to the obligation of good faith owed by Continuing Partners to Outgoing Partners, permitted to attend the meeting, he will have no vote. This is said to be unfair and, in the absence of clear wording, cannot be regarded as a sensible meaning of the provision.

They adopt what is said in Lindley and Banks on Partnership (18^th ed) at 10-72:

"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. ……"

They rely on the case cited, Wylie v Corrigan (1999) SC 97 from which Lindley derives the proposition that a court will be reluctant to find, as a matter of implication, that an outgoing partner has been deprived of his right to object to the contents of the accounts. I do not dissent from the counsel of perfection that the matter should be dealt with clearly and expressly. I do not, however, think that Wylie v Corrigan is of any assistance. In that case, there was an arbitration provision. The question was not whether the partnership agreement was to be construed as providing for an outgoing partner to be bound by the decision of the continuing partners: clearly he would not be bound because of the right to refer matters to arbitration. Rather the question was whether accounts which had been produced by the continuing partners, but which had been prepared not by them but by an auditor, were ones which they themselves could refer to arbitration or which, having been produced by them, were binding on them. In the present case, even on Mr Steinfeld's construction, there is a right to refer objections to the Partnership Board and, if necessary, on to a Partners' Meeting. This is not a case where an Outgoing Partner has no right to have a review undertaken.

Mr Steinfeld submits that a commercial approach to this commercial document leads inexorably to the meaning for which he contends. It would be absurd, he says, to reach any other conclusion. This is a partnership where it was understood that there would be regular changes in the Partners, changes taking place in the modern world where, to use my words, loyalty counts for little and money for much, and in which individuals will readily move from one firm to another in order to better their financial rewards. In those circumstances, the parties to the UK Partnership Deed must surely have envisaged that the provisions which they had agreed would enable accounting to be dealt with under their agreement in a way which would bind all concerned. It cannot have been contemplated that an Outgoing Partner who could not be persuaded to agree the accounts prepared by the continuing Partnership would have the right to go to court to obtain an account.

Mr Steinfeld puts his case principally as one of construction. But he submits in the alternative that it would be right to imply a term to produce the result for which he contends. I reject that alternative submission. A term can be implied to fill a gap where a provision does not cover the situation which falls to be dealt with. But a term cannot be implied which is inconsistent with the terms of a contract as properly construed. In the present case, there is no gap. The clause either means what Mr Steinfeld says it means or what Mr Flint and Mr Croxford say it means. That requires a meaning to be given to the clause according to conventional canons of construction. Once that is done, there is no room for further implication.

In any event, neither Mr Steinfeld's approach nor that of Mr Flint and Mr Croxford is without its difficulties of construction as I hope my analysis of the different consequences indicates. But each of the overarching results for which each side contends makes perfectly good commercial sense. If the UK Partnership Deed had made clear that an Outgoing Partner was not bound by the accounts prepared by the members of the Partnership of which he was not a member, that could not be met with an astonished reaction by the reasonable commercially-minded solicitor. As Mr Croxford points out, there may be perfectly good reasons why the partners concerned would decide to combine together on that basis. On the other hand, if the UK Partnership Deed had made it clear beyond doubt that an Outgoing Partner would be bound by such accounts – even though he may have no right to attend a meeting at which any objection fell to be considered or, though he had a right to attend, he had no vote – then, again, that would also be seen as a perfectly unexceptional way of proceeding. In those circumstances, there is no scope pursuant to the law as I understand it for implying a term.

Each side relies on the OWW Deed in support of its construction.

Mr Steinfeld says that the OWW Deed makes it absolutely clear that Mr Croxford is wrong and that, to the contrary, the irresistible conclusion is that an Outgoing Partner is bound. His argument depends, essentially, on the proposition that the OWW Deed sees the ultimate profit entitlement of a Partner or Outgoing Partner as being ascertained by reference to the accounts prepared under Clause 16.

Mr Croxford says that that argument is nonsense for the simple reason that the ultimate profit entitlement of the Outgoing Partner is not necessarily to be ascertained, in the case of the OWW Deed, by reference to the clause 16 accounts rather than pursuant to an account taken by the Court any more than it is in the case of the UK Partnership Deed. In other words, the construction for which he contends sits perfectly comfortably with the provisions of the OWW Deed.

In that context, I need to go back to Clause 10(3). From that it can be seen that the Combined Net Profit is ascertained by reference to the Net Profits disclosed by the various Partnership Accounts; in the case of Hammonds, those Accounts are the ones produced pursuant to Clause 16. There is no scope, therefore, in the context of Clause 10(3), for an argument that the Net Profits are to be ascertained in some other way, for instance by the Court taking an account. Clause 10(3) therefore informs the definition in Clause 1 of "Combined Net Profit" which means

"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.

Accordingly, one sees the draftsman of the OWW Deed describing Combined Net Profit in two different ways which, I consider, he clearly understands to mean the same thing in the context of Clause 10(3) namely:

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 draftsman can only have thought that these two came to the same thing if he regarded Net Profits within the meaning of the UK Partnership Deed as necessarily being the profits disclosed by the accounts produced pursuant to Clause 16. Since the UK Partnership Deed is, in significant respects, subject to the OWW Deed, it can be argued that the meaning to be attributed to Net Profits in the UK Partnership Deed should clearly be the same as the meaning which it evidently has in the OWW Deed. If that is correct, then the result is that an Outgoing Partner will only be entitled to receive a share of Net Profits ascertained on the basis of those accounts; it matters not whether this is because he is subject to the express binding effect of Clause or because all that he is entitled to under Clause 7.2 read with Schedule 5, is a share of the Net Profit so disclosed.

There is another approach which leads to the same conclusion. Clause 11(2) of the OWW Deed provides that, after determining the Combined Net Profits (which must be a reference to the aggregate referred to in Clause 10(3)) and the Combined Net Profits Per Partnership Point (which must be a reference to the figure arrived at using the Combined Net Profits just mentioned), the Total Profit Share of each Partner will be determined for each Partner by multiplying the Combined Net Profit Per Partnership Point by the Partnership Points allocated to him. Thus, the Partner's share in the overall profits across all partnerships is to be ascertained by reference to various partnership accounts including the accounts produced pursuant to Clause 16 of the UK Partnership Deed.

To see how the OWW Deed envisages distribution of profits being made, it is necessary to look at Clauses 11(3) and (4) of the OWW Deed. A Partner is to receive initially his share of the Net Profits of each Partnership by reference to his Partnership Share in each Partnership in accordance with the relevant partnership agreement. If he has not, as a result of that, received his Total Profit Share, then he is to receive the balance in Hammonds, such balance being paid by means of an additional notional salary in Hammonds. The OWW Deed is silent, as is the UK Partnership Deed, about the obligation of an overpaid Partner to refund overpayments but clearly he must do so.

In the result, the ultimate profit share which a Partner is entitled to receive is determined, under the OWW Deed, on the basis of the accounts produced pursuant to Clause 16 of the UK Partnership Deed. Reverting to the example in paragraph 30 above, the Outgoing Partner is entitled to receive, in respect of Year 1, a Total Profit Share ascertained using the accounts produced pursuant to Clause 16. It is, I suppose, not unarguable that the total share may be based on those accounts but that the share of Net Profit under the UK Partnership Deed itself is to be differently ascertained; however, even if that is so, the Outgoing Partner's ultimate entitlement is based on the accounts produced pursuant to Clause 16 and it seems to me, in those circumstances, to make no difference to the end result whether the Outgoing Partner falls strictly within the binding effect of Clause 16.2 or not.

In any case, that ignores the provisions of Clause 44 and paragraph 8.10 of Schedule 5. Clause 44 expresses the UK Partnership Deed to be subject to the terms of the OWW Deed and provides that the entitlement of an Outgoing Partner under Schedule 5 is to be governed by the application of both the UK Partnership Deed and the OWW Deed; and paragraph 8.10 likewise provides that the provisions of the Schedule are subject to the provisions of the OWW Deed. It is impossible to contend, therefore, that an Outgoing Partner could, by seeking an account by the Court, obtain a greater share of the overall profit than is disclosed using the accounts prepared by Clause 16. In practical terms, the Outgoing Partner will be bound.

Conclusions

In my judgment, Mr Steinfeld is correct in his construction of Clause 16.2. The analysis which I have set out in detail above presents only one difficulty and that is the meaning of Partners' Meeting in Clause 16.2. In my judgment, that must mean a meeting of individuals who are Partners when the meeting is held. I realise that the consequence is that the Partners referred to in "all Partners" are different from the Partners who comprise the Partners' Meeting. But this is because the definition of Partners' Meeting prevents me from construing it simply as a meeting of the Partners concerned, in which case it would be perfectly possible to equate "all Partners" with the Partners forming the meeting. This does little damage, in my view, to the language of the provision.

I would reach that conclusion even in the absence of the OWW Deed. However, this conclusion sits comfortably with, and is in my judgment supported by, the provisions of the OWW Deed. The Net Profits referred to in the OWW Deed are, so far as concerns Hammonds, the profits disclosed in the accounts produced pursuant to Clause 16; the aggregation under Clause 10(3) of the OWW Deed of the profits thus disclosed with the profits of other firms makes perfectly good sense. Further, the total profit share to which a Partner is entitled across all firms then reflects the profit which he is entitled to receive under the UK Partnership Deed; in contrast, a different account, for instance one taken by the Court, would produce the wrong figure to be taken into account when ascertaining overall profits. Moreover, proper effect is given to the overriding provisions of Clause 33 and paragraph 8.10 to Schedule 5 of the UK Partnership Deed.

The approach of Mr Flint and Mr Croxford suffers from what I perceive as more serious problems in relation to the UK Partnership Deed viewed in isolation than the single problem facing Mr Steinfeld's approach. Further, I do not consider that their approach is easy to reconcile with the provisions of the OWW Deed. The analysis which I have set out above is a strong pointer away from their construction of the UK Partnership Deed even if Mr Steinfeld does put it too high in saying that the conclusion for which he contends is irresistible.

I therefore conclude that the Partners referred to in the first sentence of Clause 16.2 are the individuals who were, at any time during the Partnership Year in question, Partners in the Partnership. The later references to a Partner or Partners in that Clause are references to a member or members of that group save the reference to Senior Partner and Partners' Meeting. I am prepared to make a declaration to that effect but I am not sure that I should go so far as giving an unqualified affirmative answer to the preliminary issue. I will hear what the parties have to say about that in the light of this judgment.

The summary judgment/strike out application

Hammonds' application notice seeks "summary judgment under CPR Part 24 and/or striking out of all defences based on alleged representation/misrepresentations, estoppels, claims to damages and relief from liability arising by reason of statements (including the draft FY04 accounts) made by or on behalf of the partnership board or the partnership to the partners generally" [the reference to FY04 being to the draft accounts for the year ended 30 April 2004].

Hammonds have provided, by letter dated 20 June 2008, a list of the paragraphs (or parts) of the Defence of the Addleshaw Defendants and of Schedules relating to each of the first, second, third, fourth, ninth and thirteenth Defendants to which their application relates.

The parts of the pleading which Hammonds attack relate to various alleged misleading statements which it is said were made to all of the partners at the times in question. These statements were made by particular partners who were acting in various executive roles within the firm holding office and deriving their authority under the terms of the UK Partnership Deed. In particular, various managerial functions were delegated to various elected or appointed partners. The Addleshaw Defendants claim to have acted, in reliance on such statements, to their detriment and claim that Hammonds is estopped from reclaiming repayment of overdrawn amounts from them; alternatively, they have claims based on these misrepresentations which they can set-off against whatever is owing by them. In the latter case, it is said that this set-off should be effected in the course of the taking of accounts an exercise which it is the Addleshaw Defendants' contention should be carried out by the Court.

The Addleshaw Defendants' case is summarised in Part B (paragraphs 3 to 14) of their Amended Defence. Paragraph 3.1 pleads the alleged true construction of clause 16. I have ruled against them on that point. Paragraphs 3.2 and 3.3 take further points on the basis of which the Restated 2003/2004 Accounts are said not to be binding. First, the accounts are not "audited" as required; secondly, the 2004/2005 accounts are not "Partnership Accounts" in that they do not include the results of the Italian partnership.

It is then said, in paragraph 4 that, in the premises, an account should be taken for 2003/2004 and 2004/2005 (ie by the Court) as Hammonds has failed to prepare proper accounts for those years. And by paragraph 5 it is denied that the Restated 2003/2004 Accounts and the 2004/2005 Accounts constitute a true and fair view of the affairs of the partnership of Hammonds at the relevant dates.

Paragraph 6 then pleads that the Partnership Board caused accounts to be drawn of 2003/2004; and that in May 2004, it announced financial results showing profits of £25 million. The First 2003/2004 Accounts were circulated by the Partnership Board to all Partners showing profits of about £24.4 million.

Paragraph 7 refers to a letter dated 8 December 2004 from Mr Burns and Mr Crossley (the Senior Partner and the Managing Partner) disclosing "beneficial changes" in accounting policies for 2003/2004 which might have an effect on the profit and loss account for 2004/2005 and affect adversely the comparison between that year and the former year. This paragraph finishes with the following sentence, which it is sought by Hammonds to strike out: "No statement was made to the effect that the First 2003/2004 Accounts were not reliable".

Paragraph 8 refers to letters dated 21 July 2005 to partners and former partners in which Mr Crossley disclosed that the First 2003/2004 Accounts had not been signed by the auditors and that the Partnership Board proposed to make material adjustmenta resulting in a reduction of profit to £13.5 million.

The essence of the Addleshaw Defendants' case is then set out in paragraphs 9 to 14 which, with the exception of paragraph 12, Hammonds seek to strike out in their entirety. Paragraph 9 complains about non-disclosure between May 2004 and 21 July 2005 by the Partnership Board to the Addleshaw Defendants as follows:

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.

Paragraph 10 pleads that in failing to make disclosure and failing to correct misrepresentations "Peter Crossley and others acting on the direction of the Partnership Board for the partnership were in breach of the duty of utmost good faith between partners, the terms of the UK Partnership Deed and statutory duty (a reference to the Partnership Act 1896)" whereby the Addleshaw Defendants have "suffered loss which they are entitled to recover from Hammonds and set off in the account to be taken". The words "for the partnership" can be read only as a reference to the firm as it existed at the time or times of the failure relied on. Since this alleged failure continued over a period of time, presumably each and every person who was a partner during that time is intended to be subsumed within the meaning of "for the partnership". I will say more about what is meant by "Hammonds" in this paragraph of the pleading in a moment.

Paragraph 11 pleads reliance by the Addleshaw Defendants on the representations as to the financial affairs of the partnership made by the Partnership Board, asserting that "Hammonds is thus estopped from relying upon the adjustments to the First 2003/2004 Accounts which are effected by the Restated 2003/2004 Accounts". It presumably follows from this that the Addleshaw Defendants' case is that they are entitled to a share of profits as shown in the First 2003/2004 Accounts even if the loss which they say they have suffered as a result of remaining in the Partnership when, had they been told the true position, they would have left, is less than the overstated share of actual profit.

Paragraph 12 is a complaint about a failure by Hammonds to provide books of accounts and records to the Addleshaw Defendants, an issue with which I am not concerned.

Paragraph 13 then pleads as follows:

"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."

Finally, in this summary of their case, the Addleshaw Defendants allege that the matters already set out "give rise to a number of defences" which are particularised in respect of each Addleshaw Defendant in the Schedules.

The other paragraphs which it is sought to strike out (paragraphs 54, 61, 62, 64, 66, 70, 105, 106, 108.4.1 and 108.4.2 together with parts of the Schedule) put more detail on the case as outlined above. The allegations are that Hammonds, through Mr Burns, Mr Jones, Mr Crossley or the Partnership Board were guilty of the failures and misrepresentations which are alleged. As to estoppel, paragraph 108.4.1 alleges that Hammonds is estopped from contending that the First 2003/2004 Accounts involved any material change in accounting policies and from claiming that monies should be recoverable in accordance with the Restated 2003/2004 Accounts. Finally, paragraph 108.4.2 claims that the Addleshaw Defendants "have suffered loss and damages which they are entitled to set-off against the sums claimed herein and/or to rely on in the taking of an account herein".

As to the Schedule, each Addleshaw Defendant has stated, in a Statement of Case, supported by a Statement of Truth, that if he or she had become aware of the true state of Hammonds' financial position at the time when the First 2003/2004 Accounts were circulated, he or she would have resigned from Hammonds and obtained more remunerative employment elsewhere. There will be issues at trial about when such resignation could have been effected in the light of the notice requirements of the UK Partnership Deed and about whether the alleged benefit could have been obtained and, if it could have been obtained, the quantum of the benefit. Those are not matters for me on this application, of course; I simply assume that they will be made out.

Mr Steinfeld puts his case in this way in the shortest of summary form:

"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."

I need to say a word here about who is being referred to by "Hammonds" in the pleadings. It is not a point which I needed to address in relation to the preliminary point since the point of construction has been fully argued in each sense. But it is highly relevant in the context of the action in which "Hammonds (A firm)" is the claimant (or rather, are the claimants) and in which certain former partners of a firm or firms, which went under the name "Hammonds" when they were partners, are defendants.

An ordinary partnership is not, in English law, a separate legal entity with its own legal personality. It is only a relationship, based on contract and the duty of good faith, between the partners. It is convenient for a firm to use the firm name for all sorts of purposes. Typically, there may be contracts (whether with clients of, or suppliers of services to, the firm) made between the firm and a third party. The contract is, in reality, one between the partners at the time of the making of the contract and the third party.

In the context of litigation, CPR 7.2 allows the use of the firm's name for convenience in certain circumstances. Paragraphs 5A and 5B of the Practice Direction to Part 7 contains the relevant provisions where claims are brought by or against a partnership within the jurisdiction. It is provided as follows:

"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."

Paragraph 5B of the Practice Direction then refers in paragraph 5B.1 to a "partnership membership statement" that is to say, a list of the names and addresses of the persons who were partners at the time when the cause of action accrued. A party to a claim may request the partners to provide a partnership membership statement, which the partners must provide within 14 days. In accordance with paragraph 5B.3, the party seeking a copy of the statement must, in his request, specify the date when the relevant cause of action accrued.

In the context of the present action, it is not entirely clear when any cause of action against the Defendants for, or in respect of, a refund of overpayments on account of profits actually accrued. On the basis of the construction of the UK Partnership Deed which I have held to be correct, the amount owing would not be finally quantified until the accounts prepared pursuant to Clause 16 had become binding. But it might, well before then, have been apparent that some minimum amount would be owing. It might be said that there was a cause of action against the Defendants even before the amount had been finalised. If I had held in favour of the construction advanced by Mr Flint and Mr Croxford, then presumably a cause of action (ie for an account) arose at the end of each relevant year of account on the basis that the continuing partners, as much as the outgoing partners, were entitled to have the relevant account taken in order to bind the outgoing partners to some figure.

There is, in any case, a dispute about the nature of the cause of action. As I have already mentioned, it is now accepted by the Addleshaw Defendants that where a Partner has received overpayments on account of his or her share of profits, a refund must be made. Hammonds say that this obligation arises as a matter of implication – some suitable term is to be implied into the UK Partnership Deed. The Addleshaw Defendants say that the claim is based in restitution. Whichever basis is correct, it needs to be appreciated precisely who is entitled to claim and what it is that can be claimed.

Consider, therefore, the simple case where a Partner has overdrawn on account of his share of profits without any misrepresentation having been made or concealment effected; it has just turned out that profits, for one reason or another, have fallen below their anticipated amount. Ignoring for the moment any changes in the membership of the Partnership, if a particular Partner has received £X too much, that Partner will have to make a refund of that amount; the refund will be made to the Partnership, in practice by payment into a Partnership bank account in which the paying Partner will have an interest or obligation (depending on whether the account is in credit or debit) in the same way as any other Partner. It makes perfectly good sense in this context to refer to the refund being made to the Partnership even though it does not have its own legal personality apart from its members; the refund, once paid, is partnership property to be applied in accordance with the UK Partnership Deed.

If the overpaid Partner refuses to pay, he can be compelled to refund the excess payment; whether this is on the basis of any implied term or pursuant to a restitutionary claim, may not matter. The relief, however, will not be an order for payment to the other partners individually for them to keep for themselves. Instead, the paying Partner will be ordered to account to the firm for the relevant amount to be dealt with as a partnership asset. In an action, the parties ought, in principle, to be the paying Partner as defendant, and one or more of the other Partners as claimants, in order to enforce the implied term or the restitutionary claim. The cause of action to compel an account of the overpayment is one properly asserted by the other Partners: the fruits of that cause of action will be property of the Partnership.

If the paying Partner leaves the Partnership before the amount owing by him has been paid, the cause of action against him in respect of the unpaid amount remains with the other Partners. The paying Partner will have no interest in the fruits of the action as he will have ceased to be a Partner; all his interest in the Partnership assets and its future profits will have vested in the Continuing Partners in accordance with the UK Partnership Deed. When further Partners leave the partnership, the Partnership assets pass into the ownership of the Partners from time to time and there can be no doubt, I think, that the Continuing Partners would be the correct parties to bring an account against the paying Partner. Further, when a new Partner joins the Partnership, he takes an interest in the Partnership assets (including the cause of action against the paying Partner and the fruits of that action) in the same way as other Partners.

Who, then, are the correct claimants to assert the claim in the present proceedings and how should they be described? So far as identifying the correct claimants is concerned, there should not in fact be any difficulty. They should be the Partners as at the time when the claim form was issued as the persons in whom the cause of action is then vested. I understood from what Mr Steinfeld told me that "Hammonds (A firm)" in the claim form was intended to be a reference to the individuals who were indeed partners on the date of its issue, something which is consistent with paragraph 1 of the Particulars of Claim which states that "The Claimant is a firm of solicitors….".

Whether the use of "Hammonds (A firm)" is a correct way of describing those claimants seems to me to be doubtful and appears to be an unconventional use of a partnership name in the context of litigation. But if I proceed on the basis that the firm name is being used to describe the partners at the time of the issue of the claim form and also ignore any changes in the partnership membership since the date of issue, then it would appear that the action is properly constituted and the right claimants are making their claim against the Defendants. I assume that to be the case for the purposes of this application. It must, however, be recognised that the claimants (call them Hammonds if you will) are together suing each of the Addleshaw Defendants as the persons collectively entitled to whatever amounts are owing by the Defendants in respect of their overdrawings on account of profits.

So far as the Addleshaw Defendants' defences and claims are concerned, Mr Steinfeld puts it this way:

"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."

I am not sure that the penultimate sentence is quite correct. I would have thought that the correct date for identifying the relevant other partners in Hammonds was the date of the alleged misrepresentation on which reliance was allegedly placed rather than the partners when the relevant Addleshaw Defendant ceased to be a partner. Mr Steinfeld may be correct in what he says on the footing that an incoming Partner (joining the Partnership before the time of that cessation) undertakes his share of liabilities vis a vis the relevant Addleshaw Defendant but I do not propose to decide that. With that caveat, I think that the thrust of Mr Steinfeld description of the Addleshaw Defendant's assertion is right, but reading "claims" as "defences or claims".

It should be noted, however, that what vests in the Partners from time to time is the cause of action and its fruits which could have been asserted against the paying Partner when he was a Partner. To the extent that he would have had any defence to the claim, he is entitled to retain the benefit of that defence against any incoming Partners. In particular, if, contrary to Mr Steinfeld's submission, an Addleshaw Defendant did have a claim against each of the other Partners in respect of misrepresentations/concealment on the part of certain individual Partners, then that would afford pro tanto a defence to the present claim by Hammonds to recover the overpayments alleged.

To summarise, the position appears to me to be as follows. First, the right to recover any overpayment on account of profits is vested in the Partners from time to time. If "Hammonds (A firm)" is to be taken as identifying the claimants as the Partners at the time of the issue of the claim form, then the claimants were correctly identified at that time. Whether or not the claimants need to be changed on each occasion when a Partner retires or a new Partner joins, is a matter which can be debated on another occasion. Secondly, the defences or cross-claims which an Addleshaw Defendant seeks to raise can be raised against the claimants as just identified to the same extent as they could have been raised against persons who were Partners prior to the departure of the relevant Addleshaw defendant. Thirdly, cross-claims (in contrast with defences as set-off) cannot be asserted against Partners joining the Partnership after the relevant Addleshaw Defendant had left.

The summary judgment/strike out application is, it must be emphasised, limited in its extent. It is not made in relation to specific alleged misrepresentations made uniquely to any one of the Defendants, in the context of a negotiation of the terms on which that Defendant would leave the Partnership or which might have affected the time at which he or she decided to depart. The application relates only to the consequences of the distribution of certain accounts to the Partners as a whole by those, or some of those, managing the partnership and its finances.

I have summarised the relevant pleaded facts above. The Addleshaw Defendants also say that they were provided with no proper explanation about what had led to the re-statement of the accounts and the profit for the year. They had to take proceedings to enforce their rights to inspect relevant documents. It was only as a result of those proceedings that they obtained copies of the documents referred to in the Defence and which showed that Hammonds had decided to change the accounting policies applied to the accounts. They say that the reversal of these policies took place only after they had relied throughout the 2003/2004 year on regular financial information which they received from those managing the firm, and after they had been informed of the financial results of the year. They say that they relied on this information, in particular in making their decision about whether and when to leave the Partnership. They say that the circumstances in which the policy changes were made and then subsequently reversed, remain obscure; they accuse Hammonds, throughout the present application, of seeking to avoid these issues becoming the subject of disclosure and tested oral evidence.

As to those circumstances, Mr Flint and Mr George, in their skeleton argument, say a little about the apparent motive of Hammonds in making the changes in accounting policy which led to the First 2003/2004 Accounts. I do not propose to say anything about that, and remark only that there is some evidence which they suggest – not without some reason – that shows one motivation was to conceal the fact that Hammonds had had a very poor financial year from a number of persons, including a number of disaffected partners whom the firm would wish to retain. It is submitted that there is a prima facie case that the Partnership Board acted (1) in breach of the duty of good faith they owed to each of the Addleshaw Defendants and (2) in breach of fiduciary duties which they owed to the Addleshaw Defendants. I would add this: if that submission is correct, then the Partnership Board must also have been in breach of the same duties to other Partners. Many, if not most, of those other Partners will have been as ignorant of the true position as the Addleshaw Defendants.

The Addleshaw Defendants also makes claims against the individuals (Mr Crossley and Mr Burns) who were directly responsible for perpetrating the alleged misrepresentations and concealments by reason of which they have suffered loss and damage. They have been added as parties to a Part 20 Claim made by the Addleshaw Defendants against them and specific allegations are now pleaded against them.

As is appears from the Defence, the Addleshaw Defendants contend that "each of the Claimants should be held responsible……for the breaches committed by the Partnership Board on their behalf." In making his submission to that effect, Mr Flint must, it seems to me, be viewing "the Claimants" as a different group of people from that which Mr Steinfeld says is being referred to by "Hammonds (A firm)" in the claim form. I have already looked at the Practice Direction to Part 7 of the CPR and reflected on whether the use of "Hammonds" to describe the Claimants is appropriate when, according to Mr Steinfeld, "Hammonds" was intended as a reference to the Partners at the time when the Claim Form was issued. Mr Flint, in contrast, must be viewing the Claimants as the Partners either at the time when the alleged misrepresentations were made or when the relevant Addleshaw Defendant left the Partnership: if the Partnership Board was acting, as alleged, for other Partners, it could only have been acting on behalf of individuals who were actually Partners at the relevant time or those times.

This leads immediately to a difficulty since a number of misrepresentations and concealments are alleged over a period of time during which the membership of the Partnership changed. Different individuals would, on this basis, be liable in respect of different representations or concealments. However, although "Hammonds (A firm)" as Claimants might be seen (in accordance with Mr Steinfeld's approach) as referring to the Partners at the time of the issue of the Claim Form rather than at the time of accrual of the cause of action, it cannot mean the totality of the Partners over a period of time so as to include individuals who were Partners for only part of that period. Accordingly, not all of the individuals who are liable, on the case of the Addleshaw Defendants, by virtue of the agency of the Partnership Board or others, are Claimants.

Mr Flint's submission also leads to a more fundamental difficulty for the Addleshaw Defendants which I will consider in detail in a moment but identify now, namely that the Partnership Board and others making representations or effecting concealments, were as much, acting as agents of each Addleshaw Defendant who remained a Partner at the time of the relevant representation or concealment as they were of any other innocent Partner. Accordingly, as between two Addleshaw Defendants who left the Partnership on different dates, it might be thought that the first to leave has as good a claim against the second to leave as any claim against any other Partner.

As well as asserting a claim for damages and the right to set-off damages against the claim for overpayment of drawings on account of profits, the Addleshaw Defendants also assert an estoppel against Hammonds. It is asserted that Hammonds are estopped from relying on the Revised 2003/2004 Accounts but instead must adopt vis a vis the Addleshaw Defendants the First 2003/2004 Accounts which, according to Hammonds, contain highly material provisions which they should not contain and which are inconsistent with the accounting policies of previous years. On that basis, Mr Steinfeld submits that the Addleshaw Defendants would receive a higher share of the profits for the year or years in question than that which they had agreed pursuant to the UK Partnership Deed and would do so at the expense of their erstwhile Partners. This, he says, would not be consonant with the duty of good faith between partners or the principle that partners should share the profits and losses in the manner agreed between them; it would be unfair to partners, past present and future. Why, Mr Steinfeld asks, should partners be estopped among themselves as a result of statements made by one or two of them which were wrong when those statements were made to all of the partners generally?

That is, I think, enough to explain the context of the application for summary judgment/strike out. The essence of the issue in dispute on the application is this: where a misrepresentation is made by one partner, A, in the course of the management by him of the partnership business, to all of his partners, does a partner, B, who has acted to his detriment in reliance on the misrepresentation and suffered loss as a result, have a claim not only against A personally but against the firm (or at least all of the partners in the firm excluding himself) for the loss occasioned and if so, is that claim properly to be reflected in the taking of the partnership accounts?

At this stage, I propose to look at the law on which the parties rely.

I start with Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 on which Mr Steinfeld places considerable reliance. In that case, the Appellant, Mr Houldsworth, bought from the Bank, a co-partnership registered under the Companies Act 1862, £4,000 of its stock in February 1877: he paid £9,000. Mr Houldsworth was registered as a partner, received dividends and otherwise acted as a partner. The Bank went into liquidation in October 1878 with immense liabilities; Mr Houldsworth was entered on the list of contributories and paid calls. In December 1878, he claimed against the liquidator to recover damages in respect of the sum he had paid for the stock, the money he had paid in calls, and the estimated amount of future calls. His claim was founded on an alleged fraudulent misrepresentation (it being assumed for the purpose of the appeal that such fraudulent misrepresentation was established) made to him by the directors and other officials of the Bank. It was admitted by him that after the winding-up had commenced, it was too late for him to have rescission of his contract and restitutio in integrum. It was held that, even though the fraudulent misrepresentations might, if the Bank had been a going concern, have entitled him to rescind his contract, rescission being now impossible, they afforded no ground for an action against the liquidator.

The Appellant's case was that a principal is liable for the fraud of his agent while acting within the sphere of his business; that was, so it was argued, the case where an incorporated company was acting through its directors so that, prior to liquidation, the company would have been liable for the fraud of its directors. The subsequent liquidation should make no difference to the result. This argument was rejected, but I need to spend a little time on the opinions expressed.

Lord Cairns explained (see p 323) that it had been accepted in the course of argument that if the Appellant had a claim against the liquidator, he would also, prior to the liquidation, have been able to remain a partner (ie shareholder) and at the same time to bring a claim for damages. A suggestion that the Appellant might have been able to claim as a deferred creditor after ordinary creditors was rejected as having no foundation. The question came down to this: it was whether a man, induced by fraudulent misrepresentations of agents of a company to take shares in the company, after he discovers the fraud, could elect to retain the share and to sue the company for damages.

The answer to that question was that he could not do so. Lord Cairns succinctly explained the nature of the contract into which the Appellant had entered, a contract by which "he has agreed to contribute, and the property of which, including his own contributions, he has agreed shall be used and applied in a particular way and in no other way."

He gives the example of a man who buys shares it having been represented to him that the debts of the company are £100,000 and no more. His contract, as between himself and those with whom he becomes a partner, is that he will be entitled to one hundredth part of all the property of the company, and that the assets shall be applied in meeting the liabilities of the company contracted up to the time of his joining them and those to be contracted afterwards, with any deficiency being met rateably by the shareholders according to their holdings. He regarded it as clear that the debts and liabilities of the company to which the assets of the company were dedicated could not have been intended to include a demand that the company – that is to those same assets and liabilities – pay to the incoming shareholder damages for the company's fraud. Such an application of the assets and contributions would, he considered, not be in accordance but at variance with the contract into which the new partner had entered.

Lord Cairns then considered the position when the new partner discovers that the company's debts are £500,000 rather than £100,000, of which £4,000 will fall upon his share. Instead of rescinding his contract, he elects to affirm it, that is to say "the contract by which he agreed that the assets of the company should be applied in paying its antecedent debts and liabilities". He brings an action to recover from the company that sum. If he succeeds, £4,000 would be paid out to him; but according to Lord Cairns he has contracted – and his contract remains – that these assets and contributions shall be applied in payment of the debts and liabilities amount in which the £4,000 could not be reckoned. He is thus making a claim which is inconsistent with the contract into which he has entered and by which he wishes to abide. In substance, he is seeking to approbate and reprobate, a course which the law will not allow.

Lord Selborne conducted a rather different analysis. It is worth setting out what he says at p 329:

"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…."

Lord Blackburn also agreed with the result. He was careful not to put his decision on the basis that a claim in damages (once the right to rescission had been lost) could never be brought against a company by one of its shareholders in respect of a contract procured by the fraud of the company's agent. He did not, however, go as far as Lord Selborne in the first sentence which I have just quoted from his speech.

The next case is Prole v Allen [1950] 1 All ER 476. The plaintiff was a member of an unincorporated members' club. Management was carried on by a committee. The defendants were all members of the committee and included the secretary and steward of the club. The plaintiff suffered injuries as a result of a fall in an area where the lighting was turned off; the steward had turned it off earlier in the evening before the plaintiff's fall. It was held that the defendants other than the steward owed no duty to the plaintiff concerning the safety of the premises although the steward was liable. As members of the club, it was held that the defendants, other than the steward, owed no duties to the plaintiff. Nor did they do so as committee members since there were no facts which would have justified imposing any relationship between them and the plaintiff other than their joint membership. It was found that the steward did owe a duty in the light of the responsibilities he held. The judge said this:

"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 was held that he had failed in that duty. But, notwithstanding that he was agent for all of the members, the members themselves were not, apparently, liable for his negligence.

Next in chronological order comes Robertson v Ridley [1989] 1 WLR 872. The plaintiff who was a member of an unincorporated members' club was injured when riding his motor cycle on the club's premises when it struck a pothole. The judge dismissed the plaintiff's claim against the chairman and secretary of the club (who, under the rules were "responsible in law for the conduct of the club as a corporate body [which it was not]"). The plaintiff's appeal was dismissed. At common law, an unincorporated members' club, or its officers or committee members, owed no liability to individual members except as provided in the rules and these particular rules on their true construction imposed no such duty. Prole v Allen was referred to with approval so far as concerns the general point concerning liability of members. May LJ expressed reservations about the liability of the steward who the judge had held to be liable.

The plaintiff in Melhuish v Clifford (Hooper J; 18 August 1998) was seriously injured when he fell at the premises of the Chiddingfold ex-servicemen's club of which he was a member. The first defendant was the club manager; the second defendants were representatives of the general committee and of all the members, excluding the plaintiff; and the third defendants were part-time bar staff working in the club at the time of the accident. The judge referred to Prole v Allen and Robertson v Ridley. Hooper J referred to Shaw v Ministry of Works [1950] 2 All ER 228 (which had been referred to in Robertson v Ridley too). Hooper J referred to the observation of Jenkins LJ in the earlier case who had said that it would be "surprising indeed" if the elected members of the committee of a club found themselves saddled with a warranty as to the safety of the club's premises. He doubted that the same surprise would have been expressed at the time of the case before him, 1998.

Hooper J then cited two further cases to show that such immunity as the members of a club may have enjoyed in the past in an action brought by another member had been limited. The first was Jones v Northampton Borough Council & Owen [1990] Times LR 387. Although the mere fact of membership of a club, even coupled with membership of a committee, is not enough to ground liability, Gibson LJ put this in context in the passage cited by Hooper J:

"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."

Hooper J concluded his review of the authorities by saying this:

"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)."

Hooper J acquitted the second defendants of any breach of duty, saying that he was entitled to leave matters such as the switching on and off of lights to the relevant members of staff. He nonetheless held against the second defendant on the basis that he was vicariously liable for the acts of the club's servants. Mr Flint submits that this shows that, even in the case of a members' club, "innocent" members can be made liable. Some care needs to be taken about precisely what it was that Hooper J decided. The second defendants were, it appears, sued as representing the general committee and the members as a whole although it does not appear whether they (assuming there was more than one – sometimes the judge refers to the second defendant in the singular) were members of the general committee. Mr Flint says that Hooper J found against all the members of the club other than the plaintiff. I am not sure that that is correct. The judge found the second defendants liable on the basis of their vicarious liability for the acts of the club manager and the bar staff. He held that, once it was established that a member could recover from another member, he saw no reason to exclude vicarious liability. But critical to that analysis is the identification of the relevant members who could be made vicariously liable. The vicarious liability of the second defendants must surely have arisen out of the duty of care owed by them to members of the club as members of general committee in whom was vested the power to appoint the manager. It does not follow that all the members of the club were liable to the plaintiff and I do not consider that it would be fair to read into the judge's decision that the second defendants were liable that all those persons whom they represented were also liable.

The facts of these personal injuries cases are, of course, miles from the case of a partnership. Further, as Mr Flint points out, there is this important difference: in a members' club, the individual members do not, simply by virtue of their membership, owe each other any duties relating to the state of the club's premises where partners do owe each other a duty of good faith. The courts are now more ready than in the past to find that a committee or individuals have undertaken duties to the members generally as a result of the rules of the club or the way in which it is managed; and in such cases, committee members may find themselves vicariously liable, as was the second defendant in Melhuish, for the acts of the club's servants or agents even though the committee members themselves have not been in breach of any duty. But, it should be noted that even the more recent club cases do not cast doubt on the general rule that members of a club do not, simply by virtue of their membership, owe each other any duty of care.

Mr Flint relies on the decision of Neuberger J in Mullins v Laughton [2003] Ch 250. In that case, Mr Mullins sought dissolution of a partnership on the grounds that the conduct of his partners towards him constituted a repudiatory breach of contract which he had accepted. The judge held that the defendants' conduct towards Mr Mullins was outside the wide range of acceptable behaviour which accorded with the duty of good faith between partners. However, a partnership could not be dissolved by a repudiatory breach but, on the facts, it was appropriate for the court to dissolve the partnership (although an order was made for the other partners to buy out Mr Mullins' share rather than an order for winding up the partnership).

The behaviour of which the judge was critical was that of three leading partners, Messrs Laughton, Travers and Clements in particular about the way in which Mr Mullins was purportedly removed from the partnership. As to the other defendants (the other partners) the judge had not received any evidence from them and expressed the view that they might well be open to criticism only to the extent that they had left the issue of Mr Mullins' removal to Messrs Laughton, Travers and Clements without checking that they were behaving properly. The judge did not consider that to be a major point because, as it appeared to him, that:

"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".

Included in Mr Mullins' claims was a claim for damages for loss of reputation and career disruption, a claim made not just against Messrs Leighton, Travers and Clements but against all the defendants, the basis of the claims being akin to the claim which was allowed by the House of Lords in Mahmud v BCCI [1998] AC 20. As to that, the judge said this:

"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."

It appears from these passages that all of Mr Mullins' partners were being held liable for damages since the account between all of them was to be taken on that basis. It would seem that the partners other than Messrs Leighton, Travers and Clements were liable because, in the context of Mr Mullins' removal, those three partners were agents of the other ten. One can readily see the sense of that since Mr Mullins was being removed not just from a relationship between himself and Messrs Leighton, Travers and Clements, but from the entire partnership. None of the other partners sided with him against those seeking to expel him and, in the judge's view, all of the other partners had to take the consequences of that which was done in their names.

There are a few statutory provisions which I mention at this stage. First is section 5 Partnership Act 1890 which provides that every partner is "an agent of the firm and his other partners for the purpose of the business of the partnership". The firm in this context is identified by section 4(1) which provides that persons who have entered into partnership with one another are called collectively a firm. A partner is not, of course, an agent of him/herself, but it is perfectly clear what section 5 means when it says that each partner is an agent of the firm, namely that he is agent of each of his partners and, in using the firm name, binds them as well as him/herself.

Next, there are the provisions of the Sex Discrimination Act 1975. Section 1(2) relates to circumstances where "a person discriminates against a woman if (a) on the ground of her sex, he treats her less favourably than he treats or would treat a man…". Section 11 deals with partnership and provides that it is "unlawful for a firm, in relation to a position as partner in the firm, to discriminate against a woman….(d) in a case where the woman already holds that position….(ii) by expelling her from that position….". It is expressly provided that "firm" has the meaning given to it by section 4 Partnership Act 1890. There can be no doubt that, in the context of section 11, a "firm" can discriminate against a woman partner notwithstanding that she herself is a partner in the firm; where there is unlawful discrimination within the section, the woman will bring her claim against her partners notwithstanding that those partners are not themselves a firm but only members of a firm of which the woman too is a member.

It may well be that where the action of the firm in attempting to expel the woman is opposed by a minority but achieved by a majority, that the "firm" remains guilty of discrimination, but that is not clear – it might be argued that the majority could not be said to be acting for the firm when their conduct was (a) unlawful and (b) opposed by a minority. In Dave v Robinska EAT/0950/02 ILB, 1 April 2003, HH Judge J McMullen QC giving the decision of the tribunal, gave an example of a 10 partner firm which commits an act of sex discrimination, stating that the proceedings against the firm would be brought against the nine "wrong-doing partners with the victim herself not included among the defendants". That, no doubt, is correct but it is open to some doubt, I would think, whether the tribunal was right in what it said about the 10 partner firm which decided by a majority of 7 to 3 to commit an unlawful act; namely, that proceedings would, as before, be taken against all nine, that is the majority and the dissentients (although noting correctly that proceedings would not be taken, against all 10 partners since the claimant would then also be suing herself as defendant). It is not clear to me that a partner who is discriminated against in this way would have a claim against dissentient partners who voted against the taking of the unlawful act at least in circumstances where the conduct of the majority to the woman discriminated against was a breach of the duty of good faith owed by the majority to the minority as much as to the woman concerned. In that context one might wonder what the true position is where there is concurrent discrimination against two woman partners. Is each of the two women to be liable (along with all the other partners) to the other woman? Whatever the correct position, which will in any event be dependent on the facts of any particular case, it must at least be arguable that the partners discriminated against could sue all of her partners for discrimination by "the firm".

Mr Flint relies on the 1975 Act and the example in Dave v Robinska to show that Mr Steinfeld in wrong when he says that Hammonds cannot be liable to the Addleshaw Defendants on the footing that most of the partners in Hammonds were just as innocent as the Addleshaw Defendants, or to put the matter the other way round, the Addleshaw Defendants were just as responsible as the innocent Hammonds partners, so far as the making of the alleged misrepresentations was concerned. I do not think that he is entitled to find much support in that case. The example was just that; it was not necessary, for the purposes of the actual decision in the case, to determine whether all 9 partners would be liable. Even if they would be, that could be because of special considerations applicable to the construction of this particular piece of legislation.

There is a pleading point which I should pick up here. Mr Flint says that it appears from paragraph 10 of the Reply that it is common ground that the statements and non-disclosures made by the Partnership Board were prima facie made on behalf of the partners at that time to all the other partners at that time. That is not what the Reply says; what it actually says is that "insofar as they were made on behalf of the partnership they were made by and on behalf of all the partners at that time (including the AG Defendants)" leaving it open, I would have thought, for Hammonds to argue that the misrepresentation was not made on behalf of the innocent partners.

With that somewhat lengthy review of the pleadings and of the authorities to which the parties have referred, Hammonds' application can be seen to turn on quite a short point. It is whether all or any of (i) the alleged misrepresentations of the Partnership Board or of Mr Crossley and Mr Burns leading up to the First 2003/2004 Accounts (ii) the First 2003/2004 Accounts themselves and (iii) the alleged concealments on the part of those persons can give rise to any liability on any other Partners to any of the Addleshaw Defendants. In addressing that point, it is to be assumed that those other Partners were all as innocent as were the Addleshaw Defendants; in other words, those other Partners did not expressly authorise the making of these particular representations or concealments and had no more reason than the Addleshaw Defendants to think that the representations were inaccurate. I say it is to be assumed because there is no allegation that any of those other Partners was himself or herself personally in breach of the duty of good faith owed by one Partner to another; the allegation is that those other Partners are responsible for the defaults of the identified individuals.

Distilling the parties' submissions and summarising their positions, the following picture emerges.

Mr Steinfeld submits that Houldsworth v City of Glasgow Bank precludes, as a matter of law, a finding of liability. It is inconsistent, he says, with the agreement between the Partners concerning the division of assets and liabilities that one Partner should be able to claim damages against the other Partners. I do not consider that Houldsworth leads to that conclusion. One of the significant features of that case was that Mr Houldsworth only became a shareholder because of the misrepresentation; liquidation having intervened, he could no longer exercise the remedy of rescission. But to admit a remedy in damages would be to permit Mr Houldsworth to approbate and reprobate, something which would not be allowed. There is nothing equivalent to that in the present case. Further, one concern of the House of Lords was to avoid a result under which Mr Houldsworth would be able to rank with other creditors in respect of the assets (ie those of the company) which the shareholders had, by their agreement provided should be applied in a particular way, another feature which has no real parallel in the present case.

Mr Steinfeld relies on the earlier personal injury cases to show that a member of a members' club does not, by virtue of his membership, expose himself to liabilities for wrongs done to a member through some breach of duty on the part of employees or others. The same should apply, so it is said, to any unincorporated association including a partnership. Mr Flint relies on the more recent cases to show that that prima facie position is now readily departed from by the courts. He is right to say that but, even so, there must be circumstances whether arising from the rules or the way in which individuals or committees are authorised to run the affairs of the club, which give rise to a duty of care. He submits, in any case, that there is no sensible analogy between unincorporated associations such as members' clubs and partnerships. In particular, the basis of the older cases relied on by Mr Steinfeld was that the members owe no duty to each other by reason of their joint membership whereas partners do owe each other duties, in particular a duty of good faith.

He also relies particularly on Melhuish v Clifford to show that in certain circumstances a member of a members' club can recover from another member and that a member can be vicariously liable for the acts of employees and agents. I have already considered just how far Hooper J's judgment can be seen as going to making members vicariously liable.

I do not find any of these decisions particularly helpful in deciding the extent to which the partners generally may be liable to one of their number who has relied to his detriment on the misrepresentations of another of their number in the conduct of the affairs of the partnership. There can be little doubt, I think, that such a liability can arise in some circumstances. Mr Steinfeld himself recognises that there is at least a real argument that that is correct when he accepts that the Addleshaw Defendants might have a case based on representations made to them in the course of negotiation over the terms of their departure from the Partnership.

In other areas, it is possible to imagine cases where one partner might have a claim against all his partners even though most of them are personally innocent of any wrongdoing. Suppose, for instance, that a partner in, say, the employment department of a multi-partner firm instructs the firm's conveyancing department in the purchase of a new house. In effect, the partner instructs the firm of which he himself is a member to carry out this work although he does not, of course, contract with himself. He becomes a client of the firm. The fees which he pays will form part of the firm's income and thus will be reflected in the profit share of all of the partners, including the client-partner. Suppose next that the conveyancing partner acts negligently causing the client-partner significant loss. The client-partner would surely have a strong claim for damages; it would be no answer to his claim to say that one partner cannot sue another. But, as between the partners as a whole, any damages award (ignoring the insurance position) would be taken account of in ascertaining the profits of the firm so that the client-partner would bear his share (according to his share in profits) of the damage which he has suffered.

In terms of analysis, it seems to me that one argument in favour of this result is this (I make no decision on whether or not it is correct). The client-partner instructs the conveyancing partner; he takes on the business in the same way as any other business. The business is clearly not for his own personal benefit. He must account to the firm for the fee he earns but, conversely, he does not bear personally the costs of conducting the business. Since this is business of the partnership, the conveyancing partner's acts bind his partners under section 5 Partnership Act 1890. Thus, all the partners other than the client-partner are responsible for the conveyancing partner's actions (and negligence) so that the client-partner can sue all of his partners and not just the conveyancing partner. However, since the business was for the account of the firm, any damages which the client-partner obtains will, as between the partners as a whole including the client partner be a proper outgoing of the firm to be shown in the firm's accounts. The fact that the client-partner cannot sue himself does not mean that he cannot sue his partners; but nor does it mean that, having successfully sued, the damages are not to be treated in the same way as damages awarded to any ordinary client of the firm who succeeds in a negligence action.

That example would suggest that the liability of the partners as a whole to the client-partner depends on the agency of the conveyancing partner on behalf of the firm. It also suggests that how the liability is borne as between the partners as a whole is a matter of partnership accounting, the only question being whether the award of damages is a proper outgoing in the ascertainment of profits.

It is strongly arguable (I say that simply in order to make clear that I am not deciding anything) that the same approach should apply to any act of a partner effected in "the carrying on in the usual way business of the kind carried on by the firm…" within the meaning of section 5. There are many aspects of a solicitor's business, not just the giving of advice. Contracting for utility supplies, taking a lease of business premises and hiring staff are as much part of the carrying on of business as preparing a will or drafting a complex commercial document. There will also be tasks of internal administration of the firm which can also be properly described as carrying on in the usual way the business of the partnership, from the trivial such as the changing of a light-bulb in a partner's office to the serious such as preparing management accounts and other financial material or the preparation of strategy documents for the development of the firm. If negligence on the part of the partners carrying out, or responsible for, any particular function causes a particular partner loss and damage, it may well be that the firm as a whole is liable for those damages.

Although every case will be critically fact-dependent, consider the change of the light-bulb. The member of staff employed to carry out this function does so in a thoroughly negligent way: instead of getting a ladder, he props a chair on the partner's desk. He falls off, severely injuring the partner who finds, to his alarm, that another colleague has failed to renew the firm's insurance. It would be entirely unsurprising to my mind that not only the negligent member of staff but also the firm as a whole should be liable for the negligence. Further, assuming that the injured partner would have been covered by the insurance if it had been renewed, it would be unsurprising not only to find the partner responsible for the renewal being held liable for not having done so, but also the firm as a whole.

If that approach is correct, then the same approach should apply to the preparation of financial material and in particular, the making by the Partnership Board (or Mr Crossley or Mr Burns) of announcements about profits, or the issuing of draft accounts. Accordingly, such announcements and issuing of accounts can be taken to be effected by the relevant partners as agent for the firm and the other partners (as a result of section 5 Partnership Act 1890 if for no other reason). To the extent that there is actionable misrepresentation, the partner who has suffered loss and damage can sue all of his partners; but in the division of profits, this liability will need to be taken into account. For instance, suppose that a partner, in reliance upon the misrepresentation, commits himself to some financial commitment which it transpires he cannot afford, and forfeits a deposit as a result. He may have a claim for the amount of the lost deposit, an amount which would be taken into account in the ascertainment of profits. The partner concerned will him/herself bear part of his/her loss as a result of the reduction in his share of profits. He can no more claim further damages from the firm for the reduction in his share of profit any more than any other innocent partner could do so although, I suppose, the partner making the misrepresentation might be so liable.

The position is more complicated in the present case. This is because the principal head of loss alleged by each of the Addleshaw Defendants is the extra amount which he or she would have earned in another firm if he or she had left Hammonds earlier. If that is a good claim in principle, it is necessary to identify by what reference point that extra amount it to be identified. Suppose that an Addleshaw Defendant is entitled to £X under the Re-stated 2003/2004 Accounts and suppose that he or she would have received £(X+Y) in respect of the same period in another firm. It might then be said that the correct measure of damage is £Y; to which the relevant partner might in turn say that as a result of the damages claim, his or her share of profits is not £X at all but is some smaller amount reflecting that the profits of the firm – and thus his share of those profits – will be reduced as a result of his own damages claim. Or to put it another way, the relevant partner claims £(X+Y) against which he or she gives credit not for £X but only for some lesser amount being the actual share of profit. Whether or not that is correct is not a matter which I need in this summary judgment application to resolve. It is not an easy question.

I raise the point, however, because Mr Steinfeld raises the spectre of partners other than the Addleshaw Defendants but equally blameless themselves having claims and suggests that this is one reason why claims against the firm, in contrast with claims against the Partnership Board, are misconceived. I do not agree with that suggestion. If other "innocent" partners have claims relating to identifiable loss as a result of the alleged misrepresentations, it is open to them to make such claims. Subject to the aspect discussed in the immediately preceding paragraph, each partner will, through the sharing of partnership profits and losses, bear his or her proportionate part of any such claim.

It is said by Hammonds that the agency analysis is flawed. If there is an agency, then the Partnership Board, in making its announcements and issuing draft accounts, was doing so on behalf of each and every partner. Accordingly, an Addleshaw Defendants bringing a claim against another innocent partner would be suing that partner in respect of a representation which that Addleshaw Defendant had himself made. That is not an argument which can be dismissed out of hand and I do not do so. But what might be said against it is that it seeks to derive too much from the agency. It needs to be asked why it would be a defence to another innocent partner to say that the relevant Addleshaw Defendant had made the same misrepresentation to him or her as it is alleged that he or she had made to the relevant Addleshaw Defendant.

It seems to me that it could afford a defence for only one of two reasons. The first reason is that the other innocent partner somehow relied on, or only made his own representation, because of the representation by the Addleshaw Defendant. The second reason is that the Addleshaw Defendant did not rely on, or is not to be treated as relying on, the representation from the other partner and instead relied on, or is to be treated as having relied on, his own belief as displayed by his own representation. The first reason does not stand up to scrutiny of the facts; each representation was made not because of another but because of the activities of the Partnership Board itself. The second reason is more debateable but in the end comes down to no more than an assertion of, rather than a reason for, the conclusion which it is sought to establish. These again are difficult areas.

Mr Flint says that he has an answer to the difficulty that the Partnership Board were as much agents for the Addleshaw Defendants as they were for other innocent partners. His argument, as I understand it, is that the Partnership Board in fact had no authority to make misrepresentations on behalf of them.

It does not, however, sit comfortably with that stance that the other innocent partners are bound. Mr Flint seeks to circumvent that problem by saying that those other partners have ratified (or at least that it is well-arguable that they have done so) the acts of the Partnership Board. He says that each of the claimants (unlike the Addleshaw Defendants) has adopted the acts of the Partnership Board in issuing proceedings on the basis of the Restated 2003/2004 Accounts. For my part, I do not understand how making a claim based on the Restated 2003/2004 Accounts can be taken as a ratification of the alleged misrepresentations constituted by the First 2003/2004 Accounts and the statements from the Partnership Board leading up to them.

There is also this difficulty facing the Addleshaw Defendants, although it really goes to consequences if innocent partners are liable rather than to the question of their actual liability. The difficulty is that, if the innocent Hammonds partners are to be held liable for the acts of the Partnership Board, it is not immediately obvious why one Addleshaw Defendant should not be equally liable with such innocent partners to any other Addleshaw Defendant who left the Partnership before him or her. Indeed, if an innocent partner is liable, and if the Addleshaw Defendants are correct in saying that the Partnership Board is guilty of actionable misrepresentation and non-disclosure, then it might be thought to follow that each innocent partner would have a claim against the firm, just as the Addleshaw Defendants have a claim against the firm, for the loss suffered, that is to say his or her share of the firm's liability to the Addleshaw Defendants. If that is right, then it ought to follow that the Addleshaw Defendants should be obliged to contribute to the liability of the firm to that innocent partner.

Mr Flint points out that Hammonds do not allege that an individual partner can never rely, as against his partners, on a statement by the Partnership Board. At least for the purposes of a strike out or summary judgment application, Mr Steinfeld accepts that it is arguable that statements made by the Partnership Board in the course of negotiations relating to the terms on which the Addleshaw Defendants were to depart could, in principle, give rise to claims against all of the partners and not just the Partnership Board itself. He describes the partner who is in negotiating as "in the position of an outsider". Mr Flint says that this (he calls it a concession) invalidates Hammonds' argument. Far from being an outsider, the departing partner remains a partner until he leaves and is entitled to rely on the duty of good faith owed to him to assert any cause of action which he has.

I do not agree that the concession, as he calls it, undermines Mr Steinfeld's argument in the way suggested. Whatever the scope of the duty – and let it be assumed that it is the high duty of good faith owed between partners – the fact remains that negotiations about the terms on which the departing partner actually leaves are precisely that; they are negotiations designed to result in an agreement between the departing partner on the one hand and all the other partners on the other hand. If the negotiation is handled on behalf of all the other partners by a particular partner (or, as in the present case, by the Partnership Board) it is at the very least arguable that all of the other partners will be liable to the departing partner for any actionable misrepresentation made by the partner negotiating on their behalf. The partnership agreement, on this approach, provides the source of the duty; but as with all duties arising under a partnership, the duty is owed by each partner to the other partners. There is no separate duty of the firm as a whole to any partner; the concept of a partner owing a duty to himself is one I would find hard to grasp.

I hope that what I have said adequately identifies the competing arguments. I have to say that I find the issue very difficult. The question is whether I should provide a concluded answer. Before I address that, I need to mention two other aspects of the case of the Addleshaw Defendants.

The first is that the Addleshaw Defendants also raise a case based on an estoppel to the effect that Hammonds is estopped, as against them, from asserting that the First 2003/2004 Accounts are final and binding, with the result that Hammonds' claim for any repayment of amounts distributed on account of profits would fail. Any case based on estoppel is inevitably heavily fact dependent. The estoppel arises out of the same alleged misrepresentations and concealments as form the basis of their primary case.

The second is that the Claimants raise a new case to the effect that some at least of the Addleshaw Defendants have suffered no loss. This is on the basis that Hammonds would have been entitled to hold a departing partner to his or her notice period and that damages can only run from the expiry of that period.

Should the issue be dealt with a matter of summary judgment/strike out?

I do not think that there is any serious difference between the parties about the correct principles to apply on an application such as this. The overall burden of proof rests on the Claimants to show that the Addleshaw Defendants have no real prospect of success and that there is no other reason for a trial. A "real" prospect of success is one which is more than fanciful or merely arguable. Mr Flint reminds me that I must "bear in mind that the decision-maker at trial will usually have a better grasp of the case as a whole because of the added benefit of hearing the evidence tested, or receiving more developed submissions and of having more time in which to digest and reflect on the materials": see Doncaster Pharmaceuticals Group Ltd v The Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63 at paragraph 5 (per Mummery LJ). That is particularly the case where there are factual disputes and the court is asked, in a summary manner, to determine whether there is any real prospect of success in relation to those disputes. In the present case, the facts are, however, all to be assumed in favour of the Addleshaw Defendants insofar as the facts are pleaded in the Defence. Further, as will already be apparent, I have received full submissions on the legal issue in the light of those assumed facts. It can be said that I ought therefore to decide whether Hammonds are right or wrong in what they say.

However, authority also shows that summary disposition is not appropriate in a developing area of law: see Doncaster Pharmaceuticals at paragraph 92 (per Longmore LJ).

Further, although I am asked to decide the point on the basis of the facts pleaded, there is a vast amount of disputed factual material much of which, whatever I decide on this application, will need to be gone into, not least because there is a personal claim against Mr Crossley and Mr Burns. In that context, I apprehend – although this was not argued – that if Mr Crossley and/or Mr Burns are found liable, they may seek an indemnity from their partners which would be likely, in economic terms, to put the parties in the same positions as if the Addleshaw Defendants had a good claim against their erstwhile partners in the first place.

Since this is not a case where, even if I regarded their cases as far stronger than I do, summary judgment in favour of Hammonds would be determinative of the case, rather than of only one part of it, there is a risk that granting the relief sought would delay, rather than shorten, the litigation process. To put it no higher, there must be a real prospect that the Addleshaw Defendants would appeal in which case significant delay could be incurred. Moreover, depending on the facts found by the trial judge, this difficult legal issue may not arise for decision at all.

Conclusions

In all the circumstances of the case, I do not propose to reach a final decision on the legal issues which Hammonds raise on the primary case of the Addleshaw Defendants. The issues are not straightforward. Although it is open to me to resolve legal issues – even difficult ones – on a summary judgment application, I do not consider that this is a case where I should do so, particularly given the strength of the argument in favour of the Addleshaw Defendants. Indeed, my present view leans in favour of the Addleshaw Defendants on the point. I think that the whole question is best left to the trial judge on the basis of the facts as found rather than the facts as pleaded. I would only add that I have not, in this part of this judgment, said anything which I intend to be binding on either side. Everything is up for argument before the trial judge.

The same applies to the case which the Addleshaw Defendants seek to raise on estoppel. It would not make any sense to allow the primary defence to proceed but to strike out or give summary judgment on the estoppel argument which, to a large extent, will be based on the same factual material. Having said that, I do see significant difficulties in the way of the Addleshaw Defendants.

I do not consider that the "no loss" argument should result at this stage of the proceedings in any strike out or summary judgment in favour of Hammonds. Quite apart from the fact that the issue was raised late in the day – too late I think to be raised on this application – there is a serious factual issue to be determined, namely whether Hammonds would in fact have held any of the Addleshaw Defendants to their notice periods.

Accordingly, Hammonds' application is dismissed.

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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 [2009] EWHC 216 (Ch) (13 February 2009) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2009/216.html Cite as: [2009] EWHC 216 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13/02/2009