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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Purewall & Ors v Purewall [2008] ScotCS CSOH_147 (21 October 2008)
URL: http://www.bailii.org/scot/cases/ScotCS/2008/CSOH_147.html
Cite as: [2008] CSOH 147, 2009 SCLR 50, [2008] ScotCS CSOH_147, 2008 GWD 36-544

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OUTER HOUSE, COURT OF SESSION

 

[2008] CSOH 147

 

CA37/05

 

 

 

 

 

 

 

 

 

 

 

OPINION OF

LORD DRUMMOND YOUNG

 

in the cause

 

(FIRST) HARDEV SINGH PUREWALL; (SECOND) KIRPAL KAUR PUREWALL; (THIRD) BELHAR SINGH SANGHERA; (FOURTH) SURINDER KAUR SANGHERA

Pursuers;

 

against

 

GURBAX KAUR PUREWALL

Defender:

 

 

ннннннннннннннннн________________

 

 

 

Pursuers: Davies; Archibald Campbell & Harley W. S.

Defenders: Munro; Brodies LLP

 

 

21 October 2008

[1] Prior to 30 November 2003 the parties, together with the defender's late husband, Jaipul Purewall, carried on business in partnership as restaurateurs under the name of Himalaya Tandoori. Their relationship was governed by a contract of partnership dated 4 January 1991 and registered in the Books of Council and Session on 14 January 1991. The defender's late husband died in 2002, and on 22 April 2003 the pursuers served a notice of dissolution of partnership, as permitted by the partnership contract. It is a matter of agreement that the effect of that notice was to dissolve the partnership as at 30 November 2003. Thereafter the defender intimated that she intended to carry on the business of the partnership on her own account, and she has subsequently done so.

[2] Following the dissolution of the partnership, certain provisions of the contract of partnership came into operation. Clause Tenth applies in the event of dissolution of the partnership by notice; that clause provides that, if the parties to whom such notice is given intend to continue the partnership business, a balance sheet is to be made up as at the date of dissolution in terms of clauses Fifth and Ninth (b) in order to show the sum standing at the credit or debit of the retiring partner. If that sum is a credit, clause Tenth (One) states that it should be paid to the retiring partner in accordance with the terms of clause Ninth as if he or she had died at the date of dissolution. Clause Ninth applies "In the event of the determination or dissolution of the partnership" on various bases, including death and permanent incapacity; the effect of clause Tenth (One) is that clause Ninth applies as if the retiring partner or partners had died. So far as material, Ninth (b) is in the following terms:

"A Balance Sheet shall be made up in terms of Clause Fifth hereof (and in which no value shall be placed on the goodwill of the business) as at the date of dissolution.... The sum at credit of the outgoing Partner shall be ascertained from such Balance Sheet and paid by the surviving or continuing Partners to the outgoing Partner... by six equal half yearly instalments commencing six months after the date of determination with interest (in the event of dissolution by permanent incapacity or death but not otherwise) also payable half yearly on the same date [at the Clydesdale Bank's] Base Lending Rate for the time being on the amount from time to time outstanding, with power to the surviving or continuing Partners to anticipate payment of all or any of said instalments with corresponding reduction of interest".

Clause Fifth (a) provides that a balance sheet and relative profit and loss account are to be made up on 31 May in each year by the partnership accountants and that, when these have been signed and docquetted, the balance sheet will fix conclusively the sum at credit or debit of each partner. Clause Fifth (b) makes provision for approval of the balance sheet and profit and loss account prepared by the accountants. If the balance sheet and profit and loss account remain unsigned one month after they have been submitted to a partner they are held to have been approved by him or her unless written objections have been stated by the partner within that period. Thereafter, failing agreement among the partners, any such objections are to be referred to arbitration under clause Thirteenth, and the decision of the arbiter on the objections is to be binding as among the partners.

[3] After dissolution of the partnership, the partnership accountant prepared a draft balance sheet as at 30 November 2003, the date of dissolution, and relative profit and loss account. An amended version of the draft balance sheet and accounts was issued on 8 March 2005. On 4 April 2005 the defender wrote to the partnership accountant indicating that she wished to challenge certain aspects of the draft accounts. The pursuers disputed that her challenge was a valid objection in terms of clause Fifth of the contract of partnership, and claimed that draft balance sheet and accounts had become final. They accordingly raised the present action for payment of the sums that were shown by the draft balance sheet as due to them. In her defences the defender contended that she had validly objected to the accounts in terms of clause Fifth (b) of the contract of partnership and that her objections should be referred to arbitration. Following a debate, I decided that the defender had validly objected to the balance sheet and accounts. Consequently by interlocutor dated 5 December 2006 I sisted the action to permit arbitration to take place. The arbiter heard parties at a proof before answer, and by note dated 3 March 2008 he rejected the defender's objections to the accounts. On 27 March 2008 he issued a final order which held that the final balance sheet as at 30 November 2003 as prepared by the partnership accountants was correct and final. The result of the arbiter's decision is that the pursuers' individual capital accounts as shown on the balance sheet as at 30 November 2003 are as follows:

First pursuer

г334,320

Second pursuer

г268,375

Third pursuer

г338,596

Fourth pursuer

г268,051

 

[4] The pursuers now conclude for payment of those sums together with certain amounts by way of interest. They aver that under clause Ninth (b) of the contract of partnership the sums due to them fell to be paid by six instalments, starting six months after dissolution of the partnership. Thus the first instalment was payable on 30 May 2004 and further instalments were payable every six months thereafter until 30 November 2006. Interest is averred to be due from 30 November 2003, the date of dissolution of the partnership. It is calculated on the basis that under clause Ninth (b) the interest currently due ought to have been paid every six months, and interest is claimed on the interest that is said to be so due. The defender no longer disputes that the sums standing at the pursuers' individual capital accounts will be due by her. She contends, however, that her obligation to pay those sums crystallized only when they were finally determined; and that occurred when they were determined by the arbiter, on 28 March 2008, that being the date when he issued his order and signed the closing balance sheet. Consequently the defender avers that the first instalment of the sum payable to the pursuers will be due for payment on 28 September 2008, six months after the date of the arbiter's determination. Five further instalments will be due thereafter at six-monthly intervals. No interest is currently due, and interest will only be payable in future if an instalment is paid late. Thus the dispute that now exists between the parties relates to two matters: the date when the sums due to the pursuers by the defender are payable, and the interest that is due on those sums. Both matters turn on the construction of clause Ninth (b) of the contract of partnership. It was agreed that the relevant facts were not contentious and that the matters in dispute could be determined by debate.

 

Submissions
[5] Clause Ninth (b) of the contract of partnership provides that the sum at credit of the outgoing partner is to be paid "by six equal half yearly instalments commencing six months after the date of determination". At debate counsel for the defender submitted that the expression "date of determination" was crucial. That expression, used in clause Ninth (b), had a meaning different from the expression "date of dissolution" used in the same clause. Different expressions were used in the same subparagraph of the clause, and it was reasonable to assume that the difference in wording was deliberate; thus the intention was that two distinct dates were specified. The word "determine" could in some contexts mean bring to an end, but in clause Ninth (b) the word "dissolution" was used to signify the ending of the partnership, and "determination" referred to the determination of the capital sums that were due to the outgoing partners in terms of clause Fifth (b); such determination could occur through a failure to object to the accounts or by agreement among the partners or by virtue of the decision of an arbiter. "Dissolution" and "determination" and other cognate words were used elsewhere in the contract of partnership. Moreover, clause Seventh (b), which dealt with partners' granting caution for third parties or entering into speculative ventures, stated that a partner might, on the decision of the arbiter, be declared to have ceased to be a partner as from the date of contravention; that subclause further provided that the partner should thereupon be paid out in the same manner as on bankruptcy. Thus, where it was intended that the decision of an arbiter should have retrospective effect, that was provided for in the contract. Clause Ninth (b), by contrast, did not provide for retrospective effect.

[6] Counsel for the defender further submitted that the foregoing construction accorded with business common sense. That could not be said of the pursuers' construction of clause Ninth (b). On the pursuers' construction, all of the payments due by the defender should have been made by November 2006, but the full amount to be paid by her was not determined until March 2008; moreover, the accounts as finally approved by the arbiter were different in certain respects from those originally put forward by the partnership accountants. On that basis, the defender's obligation to pay had crystallized before its amount was known. Thus it was possible that the defender might have overpaid the pursuers before the true amount due was finally determined. In that event a term would require to be inserted into the contract to permit repayment to take place. Moreover, on the pursuers' construction interest at a significant rate ran throughout the period from dissolution of the partnership on all sums outstanding. That, counsel submitted, was not a fair and reasonable outcome.

[7] On the basis of the foregoing arguments, counsel for the defender submitted that no sum was due by the defender until 27 August 2008, that being six months after the date of the arbiter's decision. The pursuers' pleadings were accordingly irrelevant, and the action was premature and should be dismissed.

[8] For the pursuers counsel submitted that that the expression "date of determination" in clause Ninth (b) should be construed as referring to the date of dissolution of the partnership rather than the date of the arbiter's award. In the context, that was the ordinary and natural meaning of the expression. Moreover, it produced a commercially sensible result. Counsel referred to sections 42 and 43 of the Partnership Act 1890. Section 43 provided that, subject to any agreement between the partners, in the event of dissolution of a partnership the amount due from a continuing partner to an outgoing partner was a debt accruing at the date of dissolution. That was the construction that the pursuers sought to put on clause Ninth (b): the debt due to the pursuers accrued at the date of dissolution. Interest was payable after that date, but there was nothing inherently unreasonable in that result, as it represented compensation for the use of partnership property in which the pursuers had a share; section 42 of the Partnership Act provided that, in the absence of agreement to the contrary, a member of a firm who has ceased to be a partner, or his estate if he has died, is entitled to either a share of profits or interest at the rate of 5% per annum on the amount of his share in the partnership assets. Once again, that accorded with the pursuers' construction of the clause.

[9] In relation to the meaning of the word "determination" as used in clause Ninth (b), counsel accepted that it could in some contexts denote the decision of an arbiter. In the context of the present agreement, however, he submitted that it clearly referred to the ending of the partnership. At the start of clause Ninth, it was provided that the provisions of the clause would operate "In the event of the determination or dissolution of the partnership" in terms of clause Seventh or Eighth. In that expression the two words "determination" and "dissolution" were clearly used as synonyms. When "determination" was used later in clause Ninth it must be assumed that it had the same meaning. Moreover, clause Ninth (b) required that a balance sheet be made up as at the date of dissolution, and the sum at credit of the outgoing partner was to be ascertained from that balance sheet and paid by the surviving or continuing partners to the outgoing partner. That indicated that dissolution was the critical date for the purposes of the clause. Finally clause Fifth, dealing with arbitration, envisaged that it should be a reasonably quick process. In that event, it was not unreasonable that the first instalment of the sum due to an outgoing partner should be payable six months from dissolution. The fact that the amount due might be fixed after that date was in any event immaterial. The amount of a sum due by one person to another was frequently assessed after the date when it was due; that was true of the vast majority of claims for debt or damages.

 

Decision
[10] The critical issue in the present debate is the meaning of the expression "date of determination" as used in clause Ninth (b) of the contract of partnership. Parties were in agreement as to the proper approach that should be taken to issues of contractual construction. The starting point was the ordinary and natural meaning of the words used by the parties, read in context. That context consisted of both the whole terms of the contract and any relevant background information about the commercial purposes of that contract. A commercially sensible construction should be adopted; unreasonable results should be avoided.

"In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language":

Mannai Investment Co Ltd v Legal Star Life Assurance Co Ltd, [1997] AC 749 at 771 per Lord Steyn, approved in Bank of Scotland v Dunedin Property Investment Co Ltd, 1998 SC 657, at 661 per LP Rodger.

[11] The starting point is accordingly the wording used by the parties in clause Ninth (b). In the event of dissolution by notice, that clause requires a balance sheet to be made up "as at the date of dissolution", and specifies that certain matters are to be taken into account or disregarded in the preparation of such balance sheet. The clause then continues:

"The sum at credit of the outgoing Partner shall be ascertained from such Balance Sheet and paid by the surviving or continuing Partners to the outgoing Partner... by six equal half yearly instalments commencing six months after the date of determination with interest... also payable half yearly on the same date...".

The critical issue in dispute between the parties is the significance of the word "determination": does it refer to the dissolution of the partnership through determination of the partnership contract or to the determination of the sum due by the accountant or arbiter? The word is clearly capable of bearing either meaning. In favour of the latter meaning, counsel for the defender stressed that the word "dissolution" was used earlier in clause Ninth (b), and that it must be supposed that the word "determination" was intended to have a different meaning; in the context that could only be a determination of the sum due by the accountant or arbiter. In some agreements it is plain that the use of different words is intended to convey a difference of meaning. Nevertheless, it is necessary to bear in mind Lord Steyn's reminder that, in construing a commercial agreement, undue emphasis should not be placed on niceties of language. I am not satisfied that the present agreement is one where much significance can be attached to the use of different words. According to its opening words, clause Ninth (b) applies to the "determination or dissolution" of the partnership. It seems clear that in this expression the words "determination" and "dissolution" are used as synonyms; this feature by itself takes much of the force out of the argument for the defender. Moreover, the structure of the agreement is complex; clause Ninth (b) is expressed as applying to the "determination or dissolution" of the partnership for a range of reasons specified in clauses Seventh and Eighth. These include death and incapacity, but they do not include dissolution by notice. The latter possibility is dealt with in clause Tenth, which states that if the partnership business is not wound up clause Ninth (b) is to apply, but on the hypothesis that any retiring partner had died. In provisions of this degree of complexity I do not think that the use of different wording has the same force as it might in a more clearly structured agreement. Accordingly, on the wording of clause Ninth alone I do not think that it is possible to arrive at a definite view as to the meaning of the word "determination" as used in part (b) of the clause.

[12] Nevertheless, when the commercial purpose of clause Ninth (b) is considered in the context of the contract as a whole, I am of opinion that the meaning is quite clear: the expression "date of determination" refers to the date of dissolution of the partnership by notice, and not to the date of any decision of the accountant or arbiter. Clause Ninth (b) is concerned with the settling of accounts between the partners in the event of the dissolution of the partnership. In the present case it operates in the context of a dissolution by notice where one of the partners wishes to continue the partnership business; that is the possibility contemplated by clause Tenth (One), which is the provision that brings clause Ninth (b) into operation. Thus the partnership business is not wound up (the possibility contemplated by clause Tenth (Two)); instead, one partner carries on the business and elects to pay out the shares at credit of the other partners. The value of those shares is calculated through the preparation of a balance sheet in which the assets of the firm are revalued. In that situation an obvious conflict of interest arises: the retiring partners will clearly wish for payment of their shares as soon as possible, as they have decided to sever their connection with the business; the continuing partner, by contrast, needs to find the resources to pay the retiring partners, and will normally require time to obtain the necessary funds. Clause Ninth (b) resolves that conflict through two provisions: the sums due to the retiring partners are paid by six half yearly instalments, thus giving the continuing partner time to pay; but interest is payable on the sums due to the outgoing partners to reflect the fact that the continuing partner has had the use of their monies during this period. That is plainly a sensible method of resolving the conflict, and indeed it is one that is commonly found in contracts of partnership and other commercial agreements. The critical point is that the interest is designed to compensate the outgoing partners for late payment; moreover that interest is set at the base lending rate of the Clydesdale Bank, which obviously represents a commercial rate. In the circumstances the payment of interest cannot be considered to be in any way penal, or indeed unfair. If, on the other hand, the continuing partner were entitled to make use of the pursuers' funds in the business without paying them any compensation, that might be considered unfair. The function of interest is precisely to provide compensation for late payment.

[13] For the defender it was argued that, on the foregoing construction, monies were payable and interest accrued before the amount of the defender's obligations to the pursuers had been determined. That is clearly correct, but it is neither a surprising nor an unusual result. Calculation of the amount due to the pursuers must obviously take place after the date of dissolution, but during the period of calculation the defender has the use of the pursuers' funds for use in the business. In these circumstances it is entirely reasonable that interest at a commercial rate should be payable. Moreover, it is very common to find that monies are not payable until some time after they become due, and after interest starts to run. That frequently occurs with contractual debts, and almost invariably occurs with claims for damages; an obligation to make reparation, for example, occurs when injuria concurs with damnum, even though the amount cannot be calculated and paid until some time later: Dunlop v McGowans, 1980 SC (HL) 73, at 81. Counsel for the defender further argued that it was possible that the defender might overpay the pursuers before the proper amount due was determined. In that event, she submitted, the contract made no provision for the amount of the overpayment. In my opinion this possibility is easily dealt with through the implication of a term that any overpayment should be repaid, with an appropriate allowance for interest; alternatively, the principles of unjustified enrichment provide a simple remedy. I accordingly do not think that there is any force in these arguments for the defender.

[14] I was referred by counsel to sections 42 and 43 of the Partnership Act 1890. Section 42(10) provides that, where a member of the firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts, then, in the absence of agreement to the contrary, the outgoing partner is entitled to choose between taking a share of profits made since dissolution or to interest at the rate of 5% per annum on the amount of his share of the partnership assets. That section does not apply to the present case because the parties' agreement makes provision for the settlement of accounts and payment of interest in a manner that is distinct from the provisions of the section; in particular, the amount of the outgoing partner's share may be referred to arbitration, and interest is payable at the base rate from time to time of the Clydesdale Bank. Nevertheless, the section recognizes that, where capital is left in a business by an outgoing partner, it is fair and reasonable that those running the business should pay interest at commercial rates on that capital; 5% was generally regarded as a commercial rate in the 19th century.

[15] Section 43 of the Partnership Act provides that, subject to any agreement between the partners, the amount due from surviving or continuing partners to an outgoing partner or the representatives of a deceased partner in respect of the outgoing or deceased partner's share is a debt accruing at the date of the dissolution or death. Section 43 thus represents the default position if nothing to the contrary is stated in the partnership agreement. It is not directly relevant to the present case, because the critical question in dispute is when the obligation to pay the outgoing partners' shares accrues. Nevertheless, on the construction that I have adopted the result is the same as that in section 43. This is significant in two respects: first, section 43 recognizes that the obligation to pay an outgoing partner's share is a debt; and secondly, it is possible, and indeed reasonable, for such a debt to accrue, in the sense of becoming due and payable, even at a time when it will not normally be able to calculate the amount due. This is because, following the dissolution of a partnership, some time is almost invariably required in order to complete a full set of financial statements as at the date of dissolution; such statements must include a balance sheet as at the date of dissolution, a profit and loss account for the period ending on that date and, most importantly, a statement of the partners' capital accounts. I should add that I was referred by counsel for the defender to Duncan v The MFV Marigold, [2006] CSOH 128, where section 43 is discussed at paragraphs [48]-[58]; I do not, however, think that the issues discussed in that case are relevant to the present case.

[16] For the foregoing reasons I agree with the pursuers' construction of clause Ninth (b) of the contract of partnership. I accordingly hold that the first instalment of the pursuers' shares in the partnership property was due on 31 May 2004 and that contractual interest is due on the sums due to the pursuers from the date of dissolution, 30 November 2003. The pursuer also has a conclusion for judicial interest on the total sums due, including contractual interest. The defender does not accept that judicial interest should be due, and the matter was not debated. I will accordingly have the case put out by order in order that the precise amount due by the defender to the pursuers can be ascertained.


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