“. . . 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.