“. . . On November 8, 1999, when Mr. McKnight discerned that Mr. Hutchison had withheld firm income from their partnership, he left the office space that the parties had shared and created his own firm, while Mr. Hutchison continued to practice in his new firm at the same premises.”

Yet nearly 20 years later there was the British Colombia Supreme Court issuing a judgment in McKnight v. Hutchison [2019] BCSC 944 in a long running partnership dispute.

In the latest running chapter Mr M sought :

• “equitable compensation” for breach of fiduciary duty
• Damages for alleged conversion
• Punitive damages

For Scots lawyers the case illustrates how work-in-progress can be valued at the end of a partnership. It also highlights that not all remedies available in other Commonwealth jurisdictions are available under Scots law, but that different remedies may be available.

FACTS

The law firm had 2 partners, M and H. While it was ongoing H acquired ownership of a company client of the firm, obtaining dividends from the client.

After dissolution M raised in effect a claim for count reckoning and payment with the payment being of the secret profits earned by H from the client. Those secret profits were ascertained and H was found liable to make them over to the firm in the accounting.

But that was not the end of the matter.  M also claimed that H had not accounted for unbilled work-in-progress carried out for clients on behalf of the firm and taken money for private purposes. M alleged that H had:

• breached his fiduciary duty of care to the firm to render invoices to clients for the work that he had carried out;
• breached his tortious (delictual) duty not to interfere with and convert money of the firm for his own private purposes or for those of the company client.

M sought “equitable compensation” for the failure to render invoices. He sought damages (compensation) for the interference with and conversion of the firm’s money and also penal damages.

The Supreme Court of British Colombia decided that

1. H had breached his fiduciary duty to render invoices for his unbilled work in progress;
2. as “equitable compensation” was restitutionary it would order H to  liability to pay the full amount that he had billed disregarding the 20% discount for bills that would have remained unrecovered;
3. H had committed the tort of conversion in withdrawing the firm’s funds for for personal uses and those of the company client
4. It would order H to pay into the firm’s funds the amounts which he had wrongfully converted.
5. That H should pay punitive damages.

DISCUSSION

Failure to Bill Work-in-Progress : breach of fiduciary duty ?

What will seem odd to Scots ears is to hear a failure to bill work-in-progress as a breach of fiduciary duty rather than a breach of the reasonable care that a partner, as agent for his firm, owns to his firm.

A feature of a fiduciary duty, as opposed to a duty of reasonable care, is that the former is a duty of loyalty, namely to put the interests of the principal or beneficiary (where the duty-holder is a trustee) ahead of the agent or trustee’s private interest.

The effect of a breach of fiduciary duty is therefore not the loss to the firm (or principal) but the private gainof the partner from putting his interests first (e.g. through non-disclosure of a private interest in a client as in this case).

By contrast a duty of reasonable care is a duty to take reasonable care to avoid loss to the firm. Therefore the breach of that duty gives rise to a loss to the firm (or principal) and a liability to pay damages, calculated in the usual way for contractual breaches.

Normally a failure to bill work-in-progress is a breach of a duty of reasonable care and not a breach of fiduciary duty. The effect might possibly have been to debit H with a figure representing damages net of the 20% of the amount billed which would have been a bad debt when billed timeously.

There is no “equitable compensation” available in Scots law.

Partner taking assets without consent : section 29 of the Partnership Act 1890

Equally odd to Scots ears will be the tort of “conversion”. No such delict exists under Scots law. Nevertheless as made clear in section 29 of the Partnership Act a partner who uses partnership property for his private benefit without the consent of the other partners must account for that property to the firm. The order for payment of monies taken would have been the same in Scotland.

There are of course no penal damages available under Scots law.

Without a partnership agreement keeping it alive after the death or departure of a partner, the firm dies also.

So any well-written partnership agreement keeps the firm alive and gives the continuing partners an option to buy out the share of the departing partner.

Typically such provisions provide for:

• ascertainment of the value of the share to be paid by the continuing partners
• payment of that value in instalments.

The reason for instalments is to protect the functioning of the business. That all makes sense.

But sometimes the drafting of the provisions – and parties’ attempts at compromise – go wrong.

That was the case for the farming partnership in Liddle v. Liddle  [2019] EWCA Civ 346 where the English High Court decided that the continuing partners should pay a lump sum instead of continuing instalments.

FACTS

The farm had 7 partners. The partnership agreement provided that upon the exercise of the option the firm’s accountants would prepare a balance sheet at the date of departure but with the assets (other than goodwill) being shown at their market value at departure with the value to be “agreed between” the parties and failing agreement within 2 months after the exercise of the option to be decided by a valuer acting as an expert.

The price would be paid in 40 equal quarterly payments the first to be made after 2 months after the expiry of the period for exercising the option.

If any instalment remained unpaid for more than 21 days after the due date the whole balance of the price would become payable.

One partner died in December 2011, another retired in April 2012 and a third retired in Octber 2013.  The relevant continuing partners duly exercised their options to purchase.

A dispute arose over the market value of the assets. Parties agreed that instead of accounts as at the dates of departures being made up the annual accounts nearest the departure dates would be used by the partnership accountants who would produce accounts showing assets both unrevalued and revalued.

There was delay in producing the accounts and the outgoers raised court proceedings seeking an order for implement of the payment provisions even though the amount due hadn’t yet been ascertained.

The judiciary at first instance held that the partnership accountants were not acting as experts and so their valuation was not binding under the agreement.  They also held that the dwellinghouses owned by the partnership should be valued on a vacant possession basis and that the outstanding issues including the valuation should be assessed and decided by the court.

Before the court could make the decision the continuers’ solicitors accepted the valuations suggested by the partnership accountants.

The continuers contended that the agreed sums should be paid in the 40 equal quarterly instalements and paid the sums that would have been due up to the date of agreement.

The outgoers contended that as the initial and subsequent instalments had remained unpaid for more than 21 days after the due date, the whole balance of the price had become payable.

The judge at first instance agreed with the outgoers, finding the provisions of the agreement to be clear despite the parties’ disagreement as to value. The continuers appealed to the English Court of Appeal arguing that on a proper interpretation of the agreement the liability to pay any instalment arose only upon the price being agreed and that there was no breach in payment of an instalment that would trigger the payment of the whole price.

The Court of Appeal decided that

1. the liability to pay any part of the price under the agreement only arose upon the ascertainment of the price
2. the price was ascertained at the point when the accountants (not acting as experts), issued the accounts with the price and not at the point when the continuers accepted the price in the accounts
3. no part of the price was paid within 21 days of the accountants issuing the accounts and therefore the whole price was payable by the continuers to the outgoers at once.

DISCUSSION

Suspensive conditions for payment (conditions precedent to payment)

It is not clear that the court’s reasoning would be followed in Scotland, although the result would be the same.

Upon the exercise of the options a contract of sale arose for the sale of the outgoers’ (the sellers’) rights under the partnership agreement to the continuers (the purchasers).

The price under the contract was to be ascertained as per a balance sheet prepared by a third party (the firm’s accountants) with the value of the assets to be agreed by the parties failing which determined by an expert.

The agreement made it clear that the first instalment of price was due to be paid within 2 months after the expiry of the option period and that if the instalment remained unpaid for over 21 days then the whole price would become instantly due.

It seems clear that the continuers’ obligation to pay the price was subjected to a suspensive condition that the price be ascertained in the method provided. Not only that, but the price would have to be ascertained in the method provided within 2 months of the expiry of the option period. Otherwise the first instalment could hardly become due.

Here, for whatever reason, the parties agreed to depart from that suspensive condition dispensing with both the method for ascertaining the price and also the implied time limit for ascertainment.

While they agreed, implicitly, for the court to decide the values (in the absence of their agreement) and therefore the price, they did not agree to alter the time limit upon which an instalment would become payable.

In that situation, absent a variation of the instalment provision, the default position under s.43 of Partnership Act 1890 would apply, namely that the continuers would have to pay the whole amount due to the outgoers as a debt due at the date of their departure.

Lessons

From the perspective of continuing partners it’s important to secure the payment of the outgoing partners’ share in instalments and to ensure that the suspensive conditions for their duty to pay in instalments as provided in the partnership agreement are fulfilled – and indeed fulfillable.

The payment of the first instalment should be tied to the binding ascertainment of the price and not an unrealistic timescale.

A failure to do so will result in a lump sum being made payable under the Act – with cash flow difficulties for the firm.

Arbitral Confidentiality v. Freedom of Information

Arbitration is a confidential process. Rule 26 of the statutory Scottish Arbitration Rules confirms this as the default position for Scottish-seated arbitrations.

But what if one of the parties to an arbitration is a Scottish public authority subject to the Freedom of Information (Scotland) Act 2002 ? (FOISA) ? The scope of Scottish public authorities includes companies wholly owned by the Scottish Government, local authorities and many different types of “quango”.

This issue arose in a recent case from Trinidad and Tobago which reached the Privy Council Maharaj v. Petroleum Company of Trinidad and Tobago [2019] UKPC 21.

FACTS

The state-owned petroleum company (Petrotrin) had entered into a joint venture agreement with World GTL for the construction and working of a gas to liquid plant in Trinidad. It also granted a guarantee. The agreement appears to have had within it an arbitration agreement for disputes to be decided by arbitration under the rules of the London Court of International Arbitration (“the LCIA”).

Article 30.1 of the LCIA Rules obliged the parties to keep all materials in the arbitration produced for its purpose confidential except to the extent that disclosure was not required by legal duty.

The joint venture agreement was terminated and arbitrations resulted, one of which was under the LCIA rules and where Petrotrin was successful. In the meantime legal proceedings had been raised against the former chairman of Petrotrin for negligence and breach of fiduciary duty in relation to the agreement.

After a general election and a change of Petrotrin’s Board, the former chairman was appointed to a government post and a government minister suggested that the claim against the ex-chairman would be dropped. Thereafter Petrotrin’s QC advised that the action was likely to be unsuccessful. He did so on the basis of the witness statements from B and T which had been given to Petrotrin for the purposes of the LCIA arbitration. After some months the action was abandoned.

Mr Maharaj, an opposition politician, applied to Petrotrin to obtain the witness statements of B and T relying on Trinidad’s freedom of information legislation. The Trinidad FOI legislation made such statements exempt from disclosure unless:

“in the circumstances giving access to the document is justified in the public interest having regard both to any benefit and to any damage that may arise from doing so.”

Petrotrin refused to disclose the statements founding on among other things the damage that could be done to public authorities obtaining benefit from arbitration  with the LCIA. Mr Maharaj sought leave to bring a judicial review of the refusal. This was refused on the basis that it was not even arguable that Petrotrin required to disclose. This refusal was confirmed by the Trinidad court of appeal. A further appeal to the Privy Council ensued.

The Privy Council decided that whatever test one applied for judicial review of the refusal, Mr Maharaj had a realistic prospect of success in obtaining disclosure on the basis of the public interest. It allowed his appeal observing that

the damage caused by disclosure would be mitigated by :

• The fact that confidentiality under the LCIA rules was not absolute;
• The witnesses B and T were themselves employees of Petrotrin who arguably had a duty to provide statements under their employment contracts in any event;

while the benefit in disclosure was enablement of the public :

• to understand and if appropriate criticize the decisions of Petrotrin in embarking on the joint venture and the gurantee;
• to be fully informed about the ex-chairman’s involvement in them so that his public appointment could be commented on or opposed; and
• to understand and if appropriate criticize the decisions to bring and abandon the action against the ex-chairman.

DISCUSSION

The Scottish Situation 

The outcome in Scotland would have been the same. This is because while under the Freedom of Information (Scotland) Act 2002 there is an absolute exemption from disclosure of information that would otherwise give rise to an actionable breach of confidence, under rule 26 of the statutory Scottish Arbitration Rules, where disclosure is “in the public interest” confidentiality does not apply and disclosure is not actionable.

In that respect the test under the Trinidad freedom on information case applied in the Maharaj case reflects the test of “in the public interest” under rule 26. The Maharaj case can therefore be seen as an example of the application of the “public interest” exception to confidentiality under rule 26.

Comments

The case illustrates that arbitral confidentiality may well be subordinate to freedom of information from public authorities. A public authority is unlikely to be able to evade its freedom of information duties through the medium of arbitration.

The situation in Maharaj  is quite distinct from for example confidential information supplied to the arbitration by the commercial party to the arbitration. That may well be exempted from disclosure by the public authority under freedom of information legislation and arbitral confidentiality may apply.

On a broader note, where an arbitration involves a public body, there is an inherent tension between the desire for confidentiality, principally of the commercial party in the arbitration, and the need for transparency in the activities of the public body as desired by the public. This case is an illustration of the means by which that tension may be resolved.

“. . . Those tensions boiled over in October 2013, when there was a fight between Lucy and Sarah in the milking parlour. Lucy and Stuart resigned in the following month. At the time when they left, there were about 63 cows in the dairy herd.”

So wrote the English Court of Appeal in Habberfield  v. Habberfield  [2019] EWCA Civ 890 in a farming dispute that resulted in an award of £ 1.17 million for a daughter against a mother.

A important feature of arbitration – as opposed to the courts – is the confidentiality of the dispute resolution process. Tensions in a dispute often reflect tensions that existed between the parties from before. Court proceedings have to be open to the public and publicly reported.

But is that in anyone’s interests ? A real benefit of arbitration is the confidentiality of the process that’s enshrined in rule 26 of the Scottish Arbitration Rules.

No washing of dirty linen in public. No damage to reputation. These are real benefits of the arbitration process, especially in Scotland.

So the message is : even without a written partnership agreement, dispute resolution can bring real benefits.

Appeal – delay and expense

The case was appealed up to the Court of Appeal from the judge at first instance. It took another 15 months, and goodness how much money to have the appeal heard and decided – it was unsuccessful.

Arbitration by contrast brings finality. Factual findings (e.g. who is believed) can’t be appealed at all. Legal errors (such as the one alleged in the Habberfield case) only if they are obvious blunders or raise legal issue of importance beyond the case in question.

Scots and English Business and Property Law Differences

It’s interesting to see the case decided on the basis of informal general assurances given by the deceased father to the daughter as to her taking over the farm. That’s not a safe basis for any binding transfer of a farm from one generation to another.

It’s likely the case would have been decided differently in Scotland on an entirely different legal basis with quite possibly the opposite result !

This highlights the differences between English and Scots law. It also underlines the importance of having a Scottish legal expert to decide such issues.