Ellis & Anor v Coleman

MR JUSTICE LAWRENCE COLLINS: The underlying dispute between the parties is whether a Partnership Agreement dated 1 April 2002 (but, in fact, executed in March 2003) obliges the Continuing Partners, Mr Ellis and Mr Hume (“the Appellants”), to pay to the Outgoing Partner, Mr Coleman (“the Respondent”), a sum of money for goodwill.

This hearing concerns an award made by Dr James Behrens in respect of the Partnership Agreement. The first part of his award relates to his substantive jurisdiction. He decided, against the objection of the Appellants, that the arbitration clause in the agreement gave him power to rule on the construction of the agreement and the dispute between the parties relating to whether a sum of money was payable for goodwill.

The Partnership Agreement was drawn up to regulate the partnership which the parties had formed to trade under the business name of JCA International, and the business was that of motorcycle and van couriers. The Partnership Agreement was plainly taken from a precedent relating to a medical practice. Clause 13.3 refers to the Partnership expenses as including the costs of keeping proper records of the ‘patients’ of the Partnership and clause 13.4 refers to the costs of carrying on the ‘practice’.

In about June 2003, the Respondent decided to retire from the Partnership and the parties agreed that the date of his retirement should be fixed as 31 July 2003. By clause 24 of the Partnership Agreement, the Continuing Partners had the option to purchase the share of an Outgoing Partner on certain terms. The Appellants decided to exercise the option to purchase the Respondent’s share and served a notice in September 2003. As a result of a failure to agree on whether goodwill was to be included, the Respondents sought a reference to arbitration by a notice in March 2004. This is an appeal as to jurisdiction under section 67 of the Arbitration Act 1996 and does not require permission. I add that an appeal to the Court of Appeal is possible only with the permission of the High Court as decided in Athletic Union of Constantinople v National Basketball Association No 2 [2002] 3 All ER 897.

Clause 33.1 of the Partnership Agreement contains the arbitration agreement. It reads as follows:

“In the event of a dispute or question between the Partners touching the Partnership the accounts or transactions thereof or the determination or winding up thereof or the construction meaning and effect of this Agreement or the rights and liabilities of the Partners or their representatives under this agreement, then (except as is otherwise provided in this Agreement) every such dispute difference or question shall be referred to a single arbitrator to be appointed in default of agreement by the President for the time being of the Chartered Institute of Arbitrators and decided by arbitration in accordance with the provisions of the Arbitration Act 1996.”

The word ‘Partners’ is capitalised in this clause and clause 1.1 contains a number of definitions. It begins:

“In this Agreement unless the context otherwise requires the following words and expressions shall have the following meanings ...

‘Continuing Partners’ means the Partners who continue to be members of the Partnership after the Succession Date;

‘Outgoing Partner’ means any Partner who ceases to be a member of the Partnership for any reason;

‘Partners’ shall mean the parties hereto and any other person or persons admitted to the Partnership who agrees to be bound by the terms hereof (being Partners who shall not have ceased to be Partners under the provisions hereof or otherwise) and references to a Partner shall be construed accordingly;

‘Partnership’ means the partnership formed by the Partners under this Agreement as varied at any time by any supplemental agreement or agreements;

‘Succession Date’ means a date on which an Outgoing Partner is deemed under this Agreement to cease to be a Partner whether by reason of death, retirement, expulsion or otherwise.”

The argument for the Appellants is that there was no dispute between the Partners as at 31 July 2003 when the Respondent ceased to be a Partner and that because the dispute must be between ‘Partners’ as defined, it was not within the arbitration clause because the effect of the definition is that the expression ‘Partner’ expressly excludes “Outgoing Partner”. It does not expressly do so; the expression is:

“... being Partners who shall not have ceased to be Partners under the provisions hereof or otherwise ...”

The arbitrator decided that the first part of the arbitration clause was not limited to existing Partners but included disputes between Continuing Partners and the Outgoing Partner. The Appellants submit that this is wrong. They say that the definition clauses of the Partnership Agreement provide a comprehensive and exhaustive definition of the expression ‘Partners’, which expressly excludes from its ambit a person who has ceased to be a Partner and is an Outgoing Partner for the purposes of clause 24. The definition must have been intended to have some meaning and was intended to exclude disputes between persons who were not existing Partners. There has to be, according to the Appellants, some temporal cut-off point; injustice would otherwise be caused to the Continuing Partners. It would mean that a matter could be referred to arbitration many years after a person had ceased to be a Partner and that the fees of the arbitration would fall on the existing Partners under clause 13.

The Appellants also say that there is no reason why the arbitration clause should be the only place where the word ‘Partners’ should not be used in its defined sense and no injustice would be caused nor would there be any lack of commercial common sense if it were construed in this way. All that a retiring Partner would have to do would be to make sure that the succession accounts were likely to be fair and will not include any after-acquired liabilities before the Succession Date. They say the construction for which the Respondent contends would defeat the provision in clause 24.2.2 relating to the determination of the market value of assets. The Outgoing Partner would choose to arbitrate rather than seek a valuation.

The Respondent says as its primary argument that the words “between the Partners” in the first line of clause 33.1 qualify the expression questioned and, therefore, even if the word ‘Partners’ is construed in a strictly literal sense by reference to the definitions, nevertheless there is a dispute or difference touching the determination of the Partnership and that comes squarely within the words of the clause.

Secondly, the Respondent says that the word ‘Partners’ in clause 33.1 should not be read literally by reference to the definition section and, although he did not expressly rely on this passage for this purpose, I have no doubt Mr Callman had in mind what Lord Hoffmann said in Investors Compensation Scheme Ltd v West Bromwich Building Society & Others [1998] 1 WLR 896, namely that where something had plainly gone wrong with the drafting it is possible to depart from literal wording. Finally, the Respondent says this is plainly a dispute between partners qua partners and obviously intended to come within the wording of clause 33.

My conclusion is that I am satisfied that the decision of the arbitrator was correct. But for the impact of the definitions clause, the effect of the arbitration clause would be absolutely plain. As the arbitrator correctly pointed out, the obvious intention of the arbitration clause was to provide that all disputes concerning the Partnership were so far as possible to be resolved by arbitration rather than by the court. Only an excessively literal interpretation of the clause in conjunction with the definition clause can produce the effect for which the Appellants contend. As Lord Steyn  said in Sirius International Insurance Co v FAI General Insurance Ltd [2004] UKHL 54 at paragraph 19:

“There has been a shift from literal methods of interpretation towards a more commercial approach ... The tendency should therefore generally speaking be against literalism.”

As a general point, I do not accept the argument for the Appellants that there is any injustice caused by interpreting the arbitration clause to include this dispute. This dispute certainly does not come within any of the categories for which the Appellants contend of a minor dispute relating to a minor matter raised many years after the event. This is plainly commercially just the kind of dispute which an arbitration clause would normally cover. It is true that there are provisions relating to the costs of valuation, but I do not think they have any impact on the interpretation of the clause. Certainly, I do not accept that clause 13.4 relating to the expenses of the Partnership has anything whatever to do with the question I have to decide. Section 61 of the Arbitration Act 1996 ensures that justice could be done as between the parties by a costs award.

Accordingly, I consider that clause 33 does apply to this dispute and that the word ‘Partners’ should not be interpreted literally by reference to the definitions section. There are other clauses in the agreement where it is plain that the word ‘Partners’ is not used in the strict sense and, if the draftsman had had in mind the problem which has arisen in this case, it would not have been drafted in the same way. In particular, clauses 2.2, 8, 25 and 35 do not quite work if the Appellants are right. Therefore, I conclude that the arbitrator did have jurisdiction and that the appeal should be dismissed.