Bottrill v Harling

This is an appeal from His Honour Judge Mackie QC sitting in the London Mercantile Court in a case in which a solicitor claims to have the capital in his capital account paid to him on his retirement, pursuant to an agreement to that effect made with his partner. The judge found in favour of the retiring partner. The partners in this case are both solicitors so it is surprising that no agreement to that effect is documented and even more surprising that they choose to litigate the matter as far as this court rather than resolve their difference by mediation or even arbitration.

The respondent to the appeal, Mr John Bottrill, was admitted in 1968 and has practised in the field of commercial and residential property and conveyancing in and around Barnet. After 1991 he practised as a sole practitioner for a time but then took a Mr Freer into partnership who started to develop and expand into immigration work; this partnership came to an end in 1999 and Mr Bottrill was left with a potential liability to Mr Freer of £150,408. Mr Freer has, however, made no claim to that sum and any claim is now apparently statute-barred.

Thereafter Mr Bottrill continued as a sole practitioner but shared offices with a firm called Law Brand where Ms Julia Harling (now the appellant), who had been admitted as a solicitor about 10 years previously and worked as a manager acquiring her own experience in domestic residential conveyancing. On 14^th August 2001 she and Mr Bottrill became partners but no written agreement as to their relationship was ever drawn up or executed, oral discussions having taken place mainly in the local public house over a bottle of red wine.

The parties now accept that it was at least agreed between them in 2001

Mr Bottrill brought certain sums into the partnership by way of capital but such sums were less than Mr Bottrill’s potential personal liability to Mr Freer of £150,408; it did not become clear for some time that this debt would not be pursued. Consolidated partnership accounts for the year ending 31^st March 2004 still showed £150,408 as being owed but that changed during 2005 when Ms Harling requested Mr Patel of the firm’s accountants, Ableman Shaw & Co for financial information which she required for the purpose of a re-mortgage. On 15^th June 2005 Ableman Shaw, under the heading of “To whom it may concern” provided Ms Harling (and forwarded to prospective mortgagees) “additional information” in respect of the 2004 accounts which included this:-

“(iii)

Other creditors of £168,105 include a balance of £150,408 brought forward since 1^st April 1999 in respect of JR Bottrill sole trader practice. The loan creditor is no longer payable and therefore can be transfer (red) to J R Bottrill capital account. The restated capital account balances at 30^th March 2004 would have been:

J R Bottrill

Debit balance per accounts £51,801

Adjustment in respect of old creditor (150,408)

no longer payable ________

Revised credit balance (£98,607)”

Mr Patel gave evidence, which the judge accepted, that he had sent this information to Ms Harling, that he had explained how the Freer debt was treated in the accounts, and that she had no liability for it and that he had therefore shown a credit to Mr Bottrill’s capital account. It was therefore clear, at any rate as from June 2005, that Mr Bottrill had a not insubstantial sum owing to him on his capital account.

In 2006 Mr Bottrill decided to retire. Ms Harling knew another solicitor, Ms Nicola Thompson, who was prepared to work in partnership with her. It was agreed that Mr Bottrill would retire in August 2006 and become a consultant to the new firm. It was further agreed that Ms Thompson would pay £25,000 for Mr Bottrill’s interest in the goodwill of the firm, work in progress and fixtures and fittings of the office. Again nothing about the termination of Mr Bottrill’s partnership was put into writing, negotiations once again taking place in a local public house. The consultancy agreement did not work out satisfactorily and was terminated. Discussions took place about finances but no conclusion was reached and in January 2011 Mr Bottrill instituted proceedings for the sum then due on his capital account, an account of profits of the partnership between 31^st March 2006 and 14^th August 2006 and consulting fees allegedly due for the period 1^st September 2006 to 31^st March 2007. In his particulars of claim he alleged that in or about August 2006 it was orally agreed that the new partnership would pay him such credit balance as was due on his capital account. Ms Harling’s defence raised numerous matters and, in particular, alleged that Mr Bottrill had made secret profits on his own account by continuing to work for his own benefit on cases which he had brought with him to the firm from the time he was acting as a sole practitioner. She alleged, in the alternative, that if the profits he made for his own account were not secret but made without her knowledge and informed consent, there should be some allowance from overheads due to the fact that he was working in the firm’s time and using the firm’s office equipment. Mr Bottrill responded that not only did Ms Harling agree to his working on old cases for his own account but she also agreed that no allowance for overheads should be made.

Mr Bottrill prepared a list of at least 23 issues for trial but by the time the matter came on for hearing the parties had either agreed or the judge (sensibly) decided that he would decide essentially the two issues I have described, namely the secret profits issue and the capital account issue. The first half of the judge’s unreserved judgment dealt with the secret profits issue. The judge observed (para 32) that the parties could now have no reliable recollection of what were short meetings (some of them in public houses) but said that, subject to one point, he preferred Mr Bottrill’s recollection of what had been agreed in relation to the profits of his own old practice. He then said:-

“39.

There is, however, one respect in which I take a different view, and that concerns the overhead costs. The allegation made by Ms Harling is that not only did the claimant carry on practising for his own account, he also gave instructions that the costs of his own practice were to be borne by the partnership rather than by him alone. The accounts for 14^th August 2001 and 31^st March 2002 were drawn up on this basis, pursuant to the claimant’s instructions. I am not convinced that the defendant understood this. The parties were under fiduciary duties to each other, which, in shorthand terms, are those summarised by [counsel] in the authorities and textbooks he drew to my attention. I do not consider that Mr Bottrill was under any fiduciary duty, unless asked to do so, to volunteer information, which would necessarily be a guestimate, about likely revenue to be earned from his existing matters. It is a common provision in transactions of this kind for existing work to continue to the credit of the person bringing it in.

40.

But in my view the overhead costs are a different matter. It seems to me, given the nature of the duty which fell upon Mr Bottrill, that there is sufficient evidence that he made it clear that an unusual provision, that is to say that no overhead costs was to be attributable to the revenue from his sole practice, was part of the deal. He may well have mentioned that to Ms Harling, I do not know, but he was under a fiduciary duty to make that plain. One of the consequences of having failed with Ms Harling to enter into a partnership agreement or to set out some summary of the terms between them is that there is insufficient evidence of what I see as an unusual and burdensome term. In those circumstances it seems to me just that some part of the overhead costs should be attributable to Mr Bottrill’s own matters. In saying that, I am not foe a moment endorsing the unrealistic calculations prepared for negotiating purposes by the defendants’ later accountants.

41.

Finally, on this issue, I emphasise that I have not determined whether or not in fact the files worked on after 14^th August 2001 for his own account were indeed limited to those account at that date.”

The judge then turned to the capital account issue. He records (para 49) that Mr Bottrill accepted he had not specifically discussed the question of his capital account with the new partner (Ms Thompson) so that the battleground was therefore primarily “once again” between Mr Bottrill and Ms Harling. He records (para 44) Ms Harling’s account as being that there were relatively brief meetings in the pub over a bottle of red wine and Mr Bottrill indicating he “simply” wanted £25,000 for his share in the partnership. “He would step down as a partner and “she would step into his shoes””. Mr Bottrill impressed the judge more favourably than Ms Harling, of whom he was in some respects critical. The judge did not accept (para 51) that Ms Harling believed that Mr Bottrill was not to receive his capital balances as part of the deal. The judge then turned to the meagre documentary evidence.

He did not, at this point, refer again to the document which Ms Harling had sent to her prospective mortgagees in June 2005 but he no doubt had that well in mind. He recorded that Ms Harling and Ms Thompson decided to retain their own firm of accountants (Goodman Jones in the person of Mr Larry Phillips) and had asked them to ask Ableman Shaw to “clean up” the accounts so that she and Ms Thompson could safely “take over”. Mr Phillips accordingly wrote to Ableman Shaw on 13^th February 2006 asking for up to date accounts and on the same day set down a list of ongoing issues for Ms Harling and Ms Thompson which included the need to separate the old and the new practice to establish “projected settlement figures for John’s retirement”. On 24^th February Ableman Shaw sent the accounts for the year ending 2005. They continued to show £150,408 under other creditors and an unadjusted balance on Mr Bottrill’s capital account as at 31^st March 2004 of £51,801. But the true position was, of course, that set out in document prepared in June 2005 for Ms Harling’s prospective mortgagees.

In or about early March 2006 Ms Harling wrote to Mr Bottrill letting him have a copy of “Heads of Terms” which she and Ms Thompson had put together

“so that you have some pre-warning of what we hope to discuss on Saturday as there does seem rather a lot to set out.”

The judge singled out two of those heads of terms as being important:-

“2.

Indemnity in relation to the Tony Freer issues - £150,000”

and

“9.

Payment into the capital account to clear overdrawn accounts.”

The judge’s comment in relation to this last entry was:-

“If that is right the transaction would not take the form recalled by Ms Harling.”

The judge then referred to documents which came into existence after August 2006 including a letter of 29^th November 2007 from Goodman Jones to Ms Harling which stated that the accounts had always included Mr Bottrill’s old practice trial balance and later exchanges showing that consideration was still being given to the adjustment of the capital accounts. It was in these circumstances that the judge had to decide, with the benefit of hearing oral evidence from both Mr Bottrill and Ms Harling, whether there had been an agreement that Mr Bottrill would be paid the amount due on his capital account as well as the figure of £25,000.

The judge concluded his judgment in this way:-

“2006 ARRANGEMENT – DECISION

61.

The position as I see it is this. It is accepted that there is no relevant agreement between Mr Bottrill on the one hand and Ms Thompson on the other. The issue is the terms agreed as between Julia and John, the rest being an issue as between Julia and Nicola as to what has been agreed between them. I repeat what I said about the quality of recollection when dealing with the 2001 agreement, although of course the 2006 agreement is five years further on. The same considerations arise. The expression “stand in the shoes” it seems to me is not a helpful one. It appears to have been used only on one occasion and if it were accurate Nicola would then find herself with claims in respect of capital as against Julia. This could not have been intended. If the parties had intended a shift as significant as switching half this potential benefit to Ms Thompson I would have expected them to address it explicitly.

62.

As appears from the documents, the context envisaged that the deal would involve Mr Bottrill receiving his capital entitlement. Of course, contemporaneous documents created both before and after the event are potentially dangerous tools because they do not reflect any later changes in negotiating position or may be the product of misunderstanding. But here there is a whole series of different pointers. The documents relied upon by Mr Sefi, seem to me to justify the submissions he makes about them.

63.

This is not just an agreement about what the parties said, because it is common ground that they did not say everything, so, in a sense, this is a contract that was partly oral and again partly the product of conduct. It was suggested to me by [counsel for Ms Harling] in his submissions that there is something unreliable about relying upon what he saw as posthumous, subjective evidence of what the agreement was. He is right in this sense: subsequent actions are inadmissible to interpret a written agreement, but the position is different where the contract is oral or partly oral and also where the material is put forward to establish whether there was indeed a contract and, if so, what its terms were. It seems to me that the contemporaneous documents are very powerful. The documents support Mr Bottrill’s case on this issue, so do the probabilities. Finally I have, for the reasons I have given, found the oral evidence of Mr Bottrill on the points at issue to be credible and correct and that given by Ms Harling to be unreliable. Mr Bottrill bears the greater responsibility for the failure of the parties to document their agreement and he may to a degree have taken advantage of Ms Harling’s comparative lack of experience. But those are not matters susceptible to legal redress. Against that background I consider that the claimant’s case is made out and he succeeds on that issue also.”

Mr John Machell QC who now appears for Ms Harling submits that the judge fell into error because he was wrong to talk of a contract made partly orally and partly by conduct. He did not specify what conduct he had in mind; he only referred to communications most of which were between Ms Harling and either the old or the new accountants, none of which could be conduct vis a vis Mr Bottrill. The judge, moreover, made no express finding that it was expressly agreed that Mr Bottrill would receive the balance of his capital account. To the extent that it is to be inferred that he did make such a finding, it was contrary to the evidence because Mr Bottrill expressly accepted in cross-examination that, not only did he not mention the matter of his capital balance to Ms Thompson, he did not mention it to Ms Harling either and any evidence of an express oral agreement was disavowed by Mr Sefi on behalf of Mr Bottrill in his closing submissions.

I have already said that this was an unreserved judgment; the trial had lasted some days in a case where the sums in dispute were relatively modest and the judge was (rightly) anxious to keep costs down as far as he could. In the light of the complexity of the issues, the judge is to be congratulated rather than to have his judgment construed as if it were a statute. For my part I do not read his judgment as concluding that there was no oral agreement so that the only agreement was an agreement coming into existence by conduct. Rather, the judge was deciding whether an oral agreement was made and he found it helpful in reaching that decision to see how the parties conducted themselves. That is an entirely acceptable exercise for a judge who has to decide whether an agreement was in fact made.

It is perhaps unfortunate that the judge did say that “in a sense, this is a contract that was partly oral and again partly the product of conduct” but to my mind the “sense” in which the judge thought the contract was partly a product of conduct was that that he was able to determine whether there was a contract that Mr Bottrill would be paid his capital balance by reference to the way the parties conducted themselves. This interpretation of the judgment is confirmed by the next but one sentence of his judgment in which the judge accepted that subsequent actions of the parties were inadmissible to interpret a written agreement already reached but said:-

“the position is different where the contract is oral or partly oral and also where the material is put forward to establish whether there was indeed a contract and, if so, what its terms were.”

I am, therefore, unable to accept Mr Machell’s submission that the judge held that there was no oral agreement and only an agreement by conduct. In those circumstances it becomes necessary to consider the submission that there was no evidence of such oral contract and that any reliance on such contract was disavowed by Mr Sefi.

Mr Machell took us through the cross-examination of Mr Bottrill on this matter which largely focused on whether there had been any mention by Mr Bottrill of his capital account in discussions with Ms Thompson. Mr Machell relied on the following exchanges in which counsel then representing Ms Harling put to Mr Bottrill that his thinking at the time was that the account would be in deficit because of the Freer debt rather than in surplus:-

“… I suggest if you thought that your capital account position was in a large deficit, you would not have agreed with Nicola or Julia as part of that agreement that you were going to be paid at some future point your capital account balance. You thought there wasn’t any?

A.

No. For the reasons I have said, I expected there to be, when the liability was stripped out of those accounts and allocated to me, I expected there to be a significant sum of money sitting there in my capital account.

Q.

But you do not suggest you indicated to Nicola at any stage, even roughly, what that amount might be?

A.

No, we didn’t discuss it at all. We didn’t discuss the … I didn’t discuss with them the details of the accounts.

Q.

And do you think Nicola would have any reason to know that on your case she was signing up to a deal where after she had paid this £25,000 she was also signing up to a liability which was completely unclear but turns out on your case to be in the region of £80,000?

A.

I’m not sure what Nicola thought, but I know what the situation was and that was that in due course the accounts would be finalised up to my date of departure and that any liability so far as Tony Freer is concerned would be removed from those accounts.

Q.

So far as you were concerned, Nicola was signing up to an arrangement where she had absolutely no idea of the liability, the further liability to you beyond the negotiated price of £25,000, but she was signing up to?

A.

The price of £25,000 wasn’t in respect of my capital account. That wasn’t what it related to. There was never any suggestion that it was in respect of my capital account.

Q.

It was an agreement that she would stand in your shoes for payment of that sum, was it not?

A.

No. I never, ever heard that phrase. Well I’ve never used the phrase in the context of my discussions with Nicola and Julia and I didn’t hear them use it.

Q.

I do not think you have answered the difficulty I suggested about the agreement that you allege which is that here is Nicola, on your case, in addition to signing up to paying you £25,000, which is a carefully negotiated price, is it not? You negotiated price?

A.

No.

Q.

Well, whether it is carefully negotiated or not it is a specific price, yes?

A.

It is s sum of money that was plucked out of the air. There was no, there was no calculation.

Q.

No, I am not suggesting there was calculation, but nonetheless it is at least a negotiated price from the point of view that it is a price that is proposed and it is a price that Nicola is prepared to pay?

A.

Yes.

Q.

And money matters to Nicola in the sense that she is not so wealthy that money is irrelevant to her?

A.

Mmm-hmm.

Q.

And yet you suggest that what she is doing is, having agreed to this £25,000, making herself jointly liable for a further sum and has no idea what it is?

A.

No, I’m not suggesting that. There was never any suggestion of that.

Q. Well is that not precisely what your case is? You allege that it was part of the agreement with her that she would pay, as a partner in the partnership, between her and Julia, whatever was outstanding on your capital account from your partnership with Julia?

A. No. She wasn’t paying the £25,000 in respect of and taking over my capital account.

Q. I am sorry, you seemed to say “No”. I thought what I asked was whether she agreed to become liable to pay whatever was due on your capital account from your partnership with Julia?

A. She wasn’t making herself liable. The partnership would, if you like, pay me what was due to me at the date of my leaving.

Q. Well, it does not really matter much, does it? Well, what is your case about what she said about what was agreed? Was it specifically agreed by her that the partnership, the new partnership between her and Julia would be liable for the payment on this capital account?

A. No, the old partnership between me and Julia, they, they … there should have been funds in that partnership to pay me my, the way that I look at it is if, if you like, undrawn profits that have accumulated in the partnership.

Q. So nothing was agreed with Nicola about this?

A. What do you mean nothing was agreed?

Q. Did Nicola agree that the new partnership between her and Julia would pay the balance of your capital account on the old partnership between you and Julia?

A. It didn’t need an agreement to do that.

Q. So it was not agreed?

A. It didn’t need a specific agreement to say, “You will get –

Q. So it was agreed non-specifically, was it?

A. It didn’t need a specific agreement to say that I was entitled to what was standing to my credit in the partnership, the old partnership between myself and Julia.

Q. Sorry, I think you are saying there was no specific agreement to that effect, is that right?

A. You have now confused me, I’m afraid. What’s the question that you’re asking?

Q. I am asking you whether there was an agreement with Nicola –

A. Mmm-hmm.

Q. – whereby the new partnership between her and Julia would be liable for the capital account balance on your old partnership with Julia. You replied, you had seemed to reply, that there was no specific agreement to that effect or at least you said it didn’t need a specific agreement. I inferred from that that there was no specific agreement to that effect. Is that correct?

A. The agreement was that she would pay £25,000, that that would cover the work in progress, the goodwill, fixtures and fittings and what have you, and, okay, I don’t, I can’t say that we actually sat down and said, “And the accountants will prepare a final figure for what you’re owed in the partnership,” but certainly that’s what happened and that’s what I expected to happen.

Q. I am asking you what was agreed?

A. Right, and I think I have just told you.

Q. So that is the full extent of what was agreed?

A. That is … Right, well then I had better … If you’re asking me to give the, the full extent, then I’d better make sure that I’m giving you the right answer. The agreement was there would be £25,000, that that would relate to the work, she would keep the work in progress, the goodwill and the fixtures and fittings, apart from a desk which I asked for. That I would sign a consultancy agreement and they would have a licence or a lease to use the offices. I would accept that we probably didn’t specifically say, “And the accountants will now sit down and work out exactly what balance there is standing to your credit in the partnership account,” but that’s what I expected and, as I understand it, that’s what happened.

Q. So just turn in file 1, please, to page 10, paragraph 19:

“In or about 2006 the claimant and the defendants, Julia and Nicola, agreed orally as follows … [blah, blah, blah]

d)

The new partnership would pay to the claimant such credit balance as was due on his capital account.”

So there was o such agreement, was there? (inaudible) accepted?

A.

That is expressed differently. I think it amounts to the same thing if –

Q.

Well either there is an agreement –

THE JUDGE: Please do not interrupt the witness.

MR MATHER: I am so sorry, my Lord.

THE JUDGE: What were you going to say, Mr Bottrill?

A.

Sorry. It amounts to the same thing that the liability that Tony Freer would be allocated to me and that that should leave a credit balance in my capital account.

MR MATHER: But nothing is agreed with Nicola about this?

A.

I can’t, I can’t honestly say that we expressed it in those words.

Q.

And nothing is agreed with Julia about this?

A.

No. The same applies.”

There is no record of Mr Sefi’s oral submissions in closing but in writing he said this:-

“16.

It is curious that there were so few meetings at which the parties discussed the terms on which C retired but what was happening was very simple according to the case for C:

•

He gets £25,000 from Nicola (not from the partnership)

•

He enters the consultancy agreement with its restrictive covenant

•

He retires from the partnership

•

He gets his desk but the equipment WIP, liabilities, and assets on the balance sheet remain with the partnership

•

He gets what is due on his capital account

17.

It is clear that nothing is said about the creditor’s balance of John: there is neither any evidence nor any allegation that the parties agreed that this entitlement should be extinguished. This is an entitlement clearly explained and set out in the document of 15^th June 2005 … and it should strain credulity that Julia, given the advice of experienced accountants furnished with the y/e 2005 accounts was not aware of it, at least in general terms.”

To my mind Mr Machell’s submission about the state of the evidence and Mr Sefi’s closing submission are not justified. There was no abandonment of the pleaded case and it is clear that the judge did not think there was. Mr Bottrill’s evidence was that he could not recollect any specific words being used about his capital account but that is hardly surprising when the conversations about his retirement took place 8 years before trial. The judge had to do his best on limited material to determine whether an agreement was in fact reached. He held that it was. It must be remembered that the judge saw all the crucial witnesses in the witness box.

The judge concluded that an agreement was made in the course of a number of discussions that took place in circumstances of which it was not surprising that the parties had no detailed recollection. Once the judge had accepted Mr Patel’s evidence that it was Mr Bottrill alone who had responsibility for any repayment being made to Mr Freer and that it was therefore he who had the benefit of the loan becoming statute-barred and that the parties knew that the loan was not enforceable, it was self-evident that Mr Bottrill’s capital contributions to the partnership would have to be dealt with. The judge rejected Ms Harling’s case that they were subsumed into the £25,000 to be paid by Ms Thompson. He accepted Mr Bottrill’s case that there was an agreement to pay him his capital contributions and he was entitled to say that the documents “strongly” supported that finding.

In my judgment this is exactly the sort of case in which Lord Hoffmann’s observations in Biogen Inc v Medeva Plc [1997] RPC 1 at 45 are apposite:-

“The need for appellate caution in reversing the judge’s evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualifications and nuance … of which time and language do not permit exact expression, but which may play an important part in the judge’s overall evaluation.”

See also Re B [2013] 1 W.L.R. 1911 para 53 per Lord Neuberger and Beacon Insurance Co Ltd v Maharaj Bookstore Ltd [2014] UKPC 21 [2014] 4 All ER 418 para 11-18 per Lord Hodge.

I would, therefore, reject Mr Machell’s criticisms of the judge’s conclusions and dismiss this appeal.

Mr Sefi sought to support the judgment by submitting that, even if no express agreement had been reached about payment to Mr Bottrill of his capital contributions, he was entitled to have them repaid as a matter of legal implication following his retirement, pursuant to section 39 of the Partnership Act 1890. In view of my conclusion that the judge’s decision about an express agreement cannot be successfully attacked, there is no need to consider this argument. I would only say that the provisions of section 39 are expressed to take effect on a winding up of the business and affairs of the firm. In the absence of an application to wind up I doubt if the legal implication on which Mr Sefi relied can be effective. It is true that Lindley & Banks on Partnership (19^th ed) para 24-02 calls a change in the composition of a partnership a “technical” dissolution but the editor adds that it is usually the result of agreement. It is therefore that agreement which has to be analysed. If it is agreed that the partnership will continue rather than be wound up and no agreement is made about capital contributions, the partner seeking repayment of his capital contributions may be in some difficulty.

Mr Bottrill wished to appeal the judge’s conclusion about the overheads incurred in relation to cases which he brought from his old practice and continued to work on while he was in partnership with Ms Harling. I have recorded the judge’s decision about this in para 7 of this judgment. Mr Sefi submitted that there was an agreement that the overheads were to be borne by the new partnership, although all the profits on such business would be for Mr Bottrill alone. The judge accepted that there may have been some mention of this to Ms Harling. Mr Sefi submitted that that was enough for an agreement or alternatively that on the evidence the judge ought to have found such an agreement. The judge held that any such term would be unusual and burdensome and that there was insufficient evidence that it was agreed. This was a finding of fact which we were confident this court would not reverse. Mr Sefi complained that the judge relied on a fiduciary duty (that had not been pleaded) which required Mr Bottrill to make plain to Ms Harling that an unusual provision was part of the deal; that was, however, to put the matter in too limited a way. Any person alleging an agreement has to show, on the balance of probability, that it was made. The fact that the parties are or are not in a fiduciary relationship is only tangentially relevant for that purpose. These were the reasons why we decided (and informed the parties at the time) that permission to cross appeal was to be refused.

I agree.

I also agree.