M Young Legal Associates Ltd v Zahid (a firm) & Ors

LORD JUSTICE WILSON: Is it possible for a person to be a partner in a firm, and thus liable jointly with the other partners to creditors of the firm, if his agreement with them is not that he should be entitled to participate in its profits but that he should be paid by the firm a specified sum, irrespective of profits, for work to be done by him on its behalf? Such is the question raised by this appeal.

The appeal is against a declaration made by HHJ Howarth, sitting as a judge of the High Court, Chancery Division, Manchester District Registry, on 26 August 2005. The declaration was made by way of determination of a preliminary issue in an action brought by M. Young Legal Associates Ltd (“the claimant”) against five defendants.

The claimant acts as an intermediary between commercial institutions and prospective litigants who need funding for their claims and/or insurance in the event that they incur liabilities for costs whether to their own solicitors or to the prospective defendants. The claimant alleges that in February 2003 it entered into a contract with a firm of solicitors, namely Zahid, in practice in Rochdale, under which it was to arrange funding and/or insurance for a large number of prospective clients of the firm who were proposing to sue their landlords for the disrepair of their homes and under which, in prescribed circumstances, the firm agreed to make payments to the claimant. The allegation in the action is that sums became payable by the firm thereunder and have not been paid.

There are five defendants to the action:

the firm Zahid itself; but in February 2004 it was dissolved and so it takes no part in the action;

Mrs Sharif; she was a partner in the firm from 1 November 2002 until its dissolution;

her husband, Mr Sharif; in that he was at no time other than a legal executive in the firm, there is an issue, as yet unresolved, as to whether the claimant has any cause of action against him;

Mr Bashir; he was a partner in the firm from the date when it began to practise, namely 4 March 2002, until 1 September 2003; and

Mr Lees; it is in relation to his status in the firm that the preliminary issue arose.

It is the contention of the claimant that Mr Lees was a partner in the firm from the date when it began to practise, namely 4 March 2002, until 31 October 2003 and that accordingly, pursuant to section 9 of the Partnership Act 1890 (“the Act of 1890”), he is liable to it, jointly with the other partners, under the contract entered into between the claimant and the firm in February 2003. Mr Lees however included in his defence a denial that he had ever been a partner in the firm so the court directed the trial of the preliminary issue thus raised. It is agreed that, if he ever was a partner, Mr Lees was indeed a partner between 4 March 2002 and 31 October 2003.

In the event the judge declared that Mr Lees was a partner in the firm. Against that declaration Mr Lees appeals; in opposition to the appeal stands the claimant. At yesterday’s hearing Mr Bashir, who appeared in person before the judge, again appeared in person: in relation to the preliminary issue he made and makes no submission one way or the other. The stance of Mr and Mrs Sharif is confusing. Before the judge they were represented by counsel and actively supported the claimant’s argument that Mr Lees had been a partner. Indeed, by a skeleton argument drafted by counsel and filed in this court, it seemed clear that they were supporting the claimant’s opposition to this appeal. But, days prior to this hearing, they ceased to be legally represented. At yesterday’s hearing Mr Sharif appeared in person, presumably with authority to speak also on behalf of Mrs Sharif; and in a few words he told us that in his view Mr Lees had not “really” been a partner. Such is, so it would appear, Mr Sharif’s analysis of the evidence and, presumably, of the law. We have to decide whether we agree with it.

The primary proposition of Mr Blackett-Ord on behalf of Mr Lees is that, unless he is entitled to participate in the profits of the firm (including being entitled to a fixed payment directly linked to and dependent upon its profits), a person cannot in law be a partner of it. Thus he commends a negative answer to the question set out at [1] above. But he has two alternative, subsidiary propositions, each scarcely pressed. The first is that, unless he is either entitled to participate in the profits of the firm or entitled to an interest in its capital, a person cannot in law be a partner of it. The second is that, unless he is either entitled to participate in the profits of the firm or entitled to an interest in its capital or is intended to assume a dominant role in its management, a person cannot in law be a partner of it. A person’s entitlement to an interest in a firm’s capital and his dominant role in its management may each be a strong indication of his status as a partner in it; but, in that, with respect, Mr Blackett-Ord has failed to make any arguable case, whether by reference to principle or to authority, that the law will always refuse to recognise that person as a partner in the absence of those features, I consider it unnecessary further to address the subsidiary propositions.

Section 14 of the Act of 1890 can render an issue of this character academic. For it provides that:

In considering the history it is helpful to have in mind the following definition of partnership in section 1(1) of the Act of 1890:

In November 2001 Mr Bashir, who had been admitted as a solicitor and obtained a practising certificate in November 1999, wanted to set up in practice in Rochdale. The idea was that Mr Sharif would act as his legal executive and office manager and that Mrs Sharif, who was in the course of qualifying as a solicitor, would join him as a partner once she had done so. There was, however, a problem. It was set by rule 13 of the Solicitors’ Practice Rules 1990. By paragraph (2) of the rule:

In November 2001 Mr Bashir thus approached Mr Lees, who had been admitted as a solicitor in 1968 and who had recently retired after many years in partnership in a firm in Oldham. In his witness statement Mr Lees said:

There was no document by which the nature of the association of Mr Lees with the proposed firm was recorded.

In November 2001 Mr Bashir and Mr Lees orally agreed upon the level of payments to Mr Lees out of the proposed firm, namely at the rate of £18,000 per annum, payable gross monthly, on the basis that Mr Lees would himself provide for payment of tax and National Insurance contribution referable thereto.

They also orally agreed that Mr Lees would not contribute any capital to the proposed firm. Furthermore Mr Lees told Mr Bashir that he would be prepared to become associated with it only if Mr Bashir was to extract a letter from the firm’s proposed bankers, The Royal Bank of Scotland, confirming that, he, Mr Lees, would not be liable for its debts to the bank; Mr Bashir procured such a letter from the bank and forwarded it to Mr Lees under cover of a letter in which he pointed out that the effect was that Mr Lees was not liable to the bank for the debts of the “partnership”. Oral discussion between the two men also extended to the indebtedness of the proposed firm to other creditors. In the course of cross-examination by Mr McGee, counsel for the claimant, Mr Lees said:

In his judgment the judge summarised the agreement as follows:

It was the evidence of Mr Lees that, pursuant to the arrangement with Mr Bashir, and reflective of the low level of payments which had been agreed, his position in the firm should be little more than a figurehead. He said that in the early months he went into the firm’s offices for two or three hours a day on two or three days a week; that his role was to help Mr Bashir and Mr and Mrs Sharif, if requested; but that he found himself seldom requested to do so; that he helped to draft odd letters and a couple of wills; and that he surveyed various files in order to assess their suitability for conditional fee arrangements. It was suggested to him on behalf of Mr and Mrs Sharif that he had adopted a much more active supervisory role in the firm; but the judge rejected that suggestion.

On 1 November 2002, having qualified as a solicitor, Mrs Sharif became a partner of the firm. Notwithstanding that at the same time Mr Bashir became qualified to supervise the practice under rule 13, he and Mrs Sharif asked Mr Lees to continue for the time being to play his role in the firm. Pointing out, however, that he was proposing to travel to New Zealand for a substantial part of the summer 2003, Mr Lees agreed to continue. The firm’s writing-paper was reprinted so as to recite the partners as Mr Bashir, Mr Lees and Mrs Sharif. The evidence of Mr Lees was that, after November 2002, his attendance at the offices of the firm decreased and that he indeed was away in New Zealand for a substantial part of the summer 2003.

When in July 2003 Mr Lees signed his tax return for the year 2002/03 he included his payments from the firm under the heading “Consultancies” in the extra pages of the return referable to “Self-Employment”. But he also completed the extra pages referable to “Partnership”. Therein he described the partnership as “Solicitors”, which was a reference to the firm “Zahid”; and he stated that his share of the partnership’s profit for the year was nil.

In the late summer 2003 the firm began to implode. On 1 September 2003 Mr Bashir, who had been unwell, resigned from the partnership, although he remained a consultant to it for a few weeks. In his place another solicitor joined the firm. On 14 October 2003 the Office for the Supervision of Solicitors (“the OSS”) appointed an officer to inspect the firm’s books; and a cash shortage of £108,000 was discovered. On 31 October 2003 Mr Lees ceased his association with the firm.

Under cover of a letter to the OSS dated 8 December 2003, Mr Lees enclosed comments upon its interim report dated 17 November 2003. He wrote:

Mr McGee complains with some force that these authorities do not clearly establish Mr Blackett-Ord’s preliminary argument. Although it would be disproportionate to descend into the detail of them, I broadly accept Mr McGee’s complaint that, although in Burnell’s case and in Pooley’s case, there are dicta helpful to Mr Blackett-Ord, neither was a case in which a discrete issue arose as to whether partnership could exist in the absence of participation in profits. Moreover on any view Walker’s case carries the argument no further: for to say that participation is not determinative is not to say that it is necessary.

Nevertheless I for my part accept Mr Blackett-Ord’s preliminary argument. I do so largely by reference to emphatic statements in support of it in the fifth edition of Lindley’s Treatise on the Law of Partnership, published in 1888. In his introductory chapter Lord Lindley, as he was to become, wrote (at 1 and 2) that:

The Act of 1890 was, however, entitled “An Act to declare and amend the Law of Partnership”. And it was soon noticed not only that the effect of section 2(3) of the Act, set out in [9] above, was to re-iterate that an agreement to share profits was not conclusive that it created a partnership but also that the core definition in section 1(1) of the Act, also set out in [9] above, provided only that, in order to be partners, it was necessary for persons to carry on a business in common with a view to profit and not that they should also share it. Was therefore the effect of section 1(1) so to amend the law as to render the sharing of profits no longer a necessary condition of partnership? In 1891 Lord Lindley wrote a supplement to his book in which he set out the terms of the Act of 1890 with annotations. In his note on the words “with a view of profit” in section 1(1), he wrote (at 14):

But what, more importantly, are the authorities upon which Mr Blackett-Ord relies for his main argument that provision for participation in profits still remains necessary to the existence of a contract of partnership? He relies upon three:

First, Blackpool Marton Rotary Club v Martin [1988] STC 823. The inspector issued an assessment to tax against the Rotary Club which was invalid if, as it contended on appeal to Hoffmann J as he then was, the club was a partnership. Among its other activities the club organised modest fund-raising events. In dismissing the club’s appeal the judge said (at 830 j):

Second, Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd (1996) SLT 186. A sublessee alleged that the nature of the arrangement between it and the headlessee referable to development land in Cumbernauld was such as to make them partners in relation to its proposed development. The Act of 1890 applies in Scotland. The Lord Ordinary, Lord Coulsfield, rejected the allegation. He said (at 195 F – J):

Third, Memec plc v. Inland Revenue Commissioners [1998] STC 754. This court had to analyse for tax purposes the nature of a so-called silent partnership between a company and its subsidiary. Peter Gibson LJ set out (at 764 e–f) five “relevant characteristics of an … English partnership”. The fifth was that “the partners own the business, having a beneficial interest, in the form of an undivided share in the partnership assets … including any profits of the business.” The proposition is uncontroversial for on any view participation in profits is a characteristic of a partnership. The question, not raised in the Memec case, is whether it is a pre-requisite.

I trust that I do not obscure my profound respect for the judges responsible for them if I say that the remarks in the above three cases represent a thin collection of authority in support of Mr Blackett-Ord’s main argument, particularly in the light of the passage of a century during which, were it valid, one might expect a court clearly so to have stated.

The case of Stekel v Ellice [1973] 1 WLR 191 runs counter to Mr Blackett-Ord’s submissions; and in effect he accepts that, if we are to uphold his submissions, we need to hold that it was wrongly decided. The dispute, which was between two chartered accountants, was whether, as the claimant alleged, they had been in partnership or whether, as the defendant alleged, the claimant had been his employee. The written agreement between them had provided that the claimant should be “a salaried partner at £2000 per annum”; that, apart from the claimant’s furniture, the “capital of the partnership” should be provided by, and solely belong to, the defendant; and that the defendant should be entitled to all the profits and bear all the losses. So the agreement required Megarry J to grapple not only with the point of principle, namely whether provision for fixed payment rather than for a share of profits precluded the existence of a partnership, but with the significance of the phrase “a salaried partner”. Having observed (at 198E) that the phrase was not a term of art and to some extent might be said to be a contradiction in terms, he continued as follows (at 199G – 200C):

It is largely by reference to the case of Stekel that, in his excellent book on Partnership, 2 ^nd edition (2002), Mr Blackett-Ord himself writes as follows (at 11.15):

An employee who is not a partner but who is described as a partner to enhance his own status or that of the firm …

A true partner who receives all or most of his remuneration in the form of a salary rather than a simple share of profits.

I agree with the decision in the case of Stekel and with the propositions in the books on Partnership by Lindley and Banks and by Mr Blackett-Ord himself to the effect that an agreement for a person to be paid a specified sum for work to be done by him on behalf of a firm does not preclude his thereby becoming a partner of it. No authority for the contrary proposition can be derived from the Act of 1890 even though it would have been simple to provide for it either in the core definition in section 1(1) or, in particular, in section 2(3) in which the significance of receipt of a share of profits in determining whether a partnership exists is expressly addressed. On the contrary, the words of the core definition are wide enough to render the recipient of payments in a fixed sum a partner provided that there is a business, that it is carried on with a view to profit and, crucially for present purposes, that he is carrying it on in common with another or others. Indeed, in that a definition is a precise statement of a thing’s essential nature, I would regard it as inconsistent with section 1(1) – and so not permitted by section 46 – to graft on to its words the previous requirement at common law for participation in profits. Nor do I see any logic behind a situation in which

an agreement that a person should receive a share of profits, however nominal that share might be, could make him a partner and indeed was prima facie evidence thereof (section 2(3)); and

an agreement that a person should receive a share of profits limited to payments in a fixed sum could make him a partner ( In Re Hill [1934] 1 Ch 623); but

an agreement that a person should receive payments in a fixed sum, irrespective of profits, precluded his being a partner.

It is idle to deny that, indirectly, an employee has an interest in the profitability of the firm for the continuation of his job may well depend on it. Nevertheless the absence of a direct link between the level of payments and the profits of the firm is in most cases a strongly negative pointer towards the crucial conclusion as to whether the recipient is among those who are carrying on its business. But the conclusion must be informed by reference to all the features of the agreement. Thus, for example, provision or otherwise for a contribution on his part to the working capital of the firm will be relevant. And it will be important to discern whether, expressly or impliedly, the agreement provides not only that acts within his authority should bind the acknowledged partners but also that their such acts should bind him; for such is provided by section 5 of the Act to be a necessary incident of partnership but would, of course, be inconsistent with his status as an employee.

In the present case, partly because Mr Bashir chose not to give evidence, there was limited exploration before the judge as to whether the agreement between him and Mr Lees was for the latter to be paid £18,000 per annum by way of quantification of his share of the profits and thus only if the profits proved to be at least of that size. The result of a fuller exploration might have been interesting; but we have to proceed, as did the judge, on the basis that the agreement was for payment to Mr Lees irrespective of whether the firm generated profits of that size or indeed proved to be profitable at all. As I have indicated, the provisions for payments to Mr Lees of a fixed sum and for him not to be required to contribute capital to the firm each point to the absence of partnership.

In my view, however, the judge’s conclusion was correct. There was one feature of the context to the agreement between the two men which was determinative, namely the need for a solicitor’s practice to comply with rule 13 of the Rules of 1990. Its effect was that the firm could lawfully practise between March 2002 and November 2002 only if Mr Lees was a partner in it. The evidence of both men was that it was in order to comply with rule 13 that they entered into the agreement and indeed that Mr Lees became associated with the firm at all.

Let me hasten to accept that, in the absence of one crucial though uncontroversial finding, the presence of rule 13 in the context of the agreement would not have been determinative. It would be perfectly possible for two men in the position of Mr Bashir and Mr Lees to decide that they would only pretend to comply with rule 13 and that in fact they would not enter into partnership together. Had such been the facts then, subject only to a difficult argument raised on behalf of Mr and Mrs Sharif by their former lawyers in a Respondent’s Notice that any assertion of such facts should be subject to an estoppel, there would indeed have been no partnership. But it was never asserted, whether by Mr Lees or otherwise, that the agreement was reached in order only to pretend to comply with rule 13. On the contrary Mr Lees asserted to the OSS that the partnership had not been a sham; and in his evidence in the proceedings he never sought to withdraw or to qualify that assertion. Thus it was inevitable that the judge should make the crucial finding that neither of the men intended to circumvent what rule 13 required.

In that the two men intended to comply with rule 13, they must have intended to enter into a contract of partnership. I believe that the judge was entitled to infer, indeed correct to infer, that, notwithstanding the nature of the provisions for the firm’s payment to Mr Lees and for the absence of a contribution on his part to its capital, they succeeded in implementing their intention.

The answer to the question set out at [1] above is yes. I would dismiss the appeal.

LORD JUSTICE HUGHES: I agree.

For my part I prefer to leave open the question whether prior to the Act of 1890 it was a necessary condition of partnership that there be an agreement to share profits. I do not for a moment doubt the great weight to be accorded to the opinion of Lord Lindley in the fifth edition of his celebrated work, which my Lord has cited at paragraph 24. So far, however, as the researches of Counsel have been able to discover, his proposition on this topic was never submitted to the test of a case in which the question with which we are now faced arose for necessary decision. That the sharing of profits is a characteristic of partnership, as distinct from an essential ingredient of it, was and is uncontroversial.

However that may be, the words of section 1 of the Act of 1890 seem to me to put the matter beyond doubt. They refer to the making of profit as an aim, but studiously abstain from reference to any necessity that it be shared. On principle it seems to me that if there is an essential element of partnership it is the carrying on of business in common, that is to say in such manner as to make each the agent of the other for all acts done in the course of the business. Having thus constituted themselves, the partners are free under the Act to arrange for the remuneration of themselves in any manner they choose, including by agreement that one or more shall receive specific sums, or that one or more receive nothing, in either case irrespective of profits.

For the reasons set out by my Lord I too would dismiss this appeal.