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Case Studies in 2004

04/10/04

HIRST V ETHERINGTON AND ANOTHER, THE TIMES, 21 JULY 1999 (COURT OF APPEAL)

HIRST V ETHERINGTON AND ANOTHER, THE TIMES, 21 JULY 1999 (COURT OF APPEAL) DUBAI ALUMINIUM CO. LTD V SALAAM AND OTHERS, THE TIMES 21 APRIL 2000 (COURT OF APPEAL) LAWRENCE AND OTHERS V FARNDON AND OTHERS 23 JANUARY 1998, JUDGE RICH QC, CHANCERY DIVISION

Whether firm bound by solicitor’s undertaking Mr Hirst was approached by a man called Barnes-Taylor, who claimed to have a mutual friend. Mr Barnes-Taylor explained that his business partner, Mr Wilkinson, had the benefit of a solicitor's undertaking for over E600,000 as a result of a deferred completion of a property matter. In order to take advantage of another business opportunity, Mr Wilkinson needed access to a sum of money for a period of six months. He was prepared to offer a good return. Security would be provided by an undertaking from Etheringtons, solicitors to Mr Wilkinson's family trust.

Before accepting the undertaking, Miss Hedges, solicitor to Mr Hirst, ascertained that Mr Etherington was on the roll of solicitors and that the firm Etheringtons consisted of two partners. She asked whether the undertaking was given in the normal course of business so that it would bind the other partner, Miss Bassett, and Mr Etherington assured her that it was. She did not ask, neither was she told, any more about the transaction. On the strength of the undertaking, Mr Hirst transferred the sum of £30,000 to Aldan Properties Limited, a company of which Mr Wilkinson was director. Needless to say, the money was not repaid. Mr Etherington was adjudicated bankrupt, and proceedings against him were stayed.

Allowing Miss Bassett's appeal against a finding that she was bound by the undertaking, the Court of Appeal held that a solicitor's undertaking did not inevitably bind his partner. The appropriate test, as Glidewell J stated in United Bank of Kuwait v Hammoud [1988] 1 WLR 1051, was whether a reasonably careful and competent lender would have concluded that there was an underlying transaction of a kind which was part of the usual business of a solicitor. It was not a normal part of a solicitor's business to guarantee repayment of a loan made to his client. 

Miss Hedges was not entitled to rely on the bare assertion that the undertaking was given in the ordinary course of business. She should have made appropriate enquiries into the nature of the transaction in order to form her own view. A client in the position of Mr Wilkinson should, and impliedly does, give the solicitor authority to disclose sufficient information to enable the recipient of the undertaking to judge whether it was in the ordinary course of business.  It was submitted on behalf of Mr Hirst that, if questioned further about the transaction, Mr Etherington could simply have piled `untruth upon untruth' to invent a bogus transaction of the type a solicitor would normally conduct. The Court of Appeal considered that this did not justify failing even to enquire. If the reply had been sufficient to satisfy a reasonably careful and competent lender, it would have bound the firm whether or not it was in fact truthful. 

Though it is always troublesome choosing which of two innocent parties is to bear the loss caused by the default of another, it is submitted that this decision must be right. Section 15 of the Partnership Act 1890, which provides that "an admission or representation made by a partner concerning the partnership affairs, and in the ordinary course of its business, is evidence against the firm," cannot apply to representations as to a partner's authority to bind the firm. This was recognised as long ago as 1792 (see Ex p Agace (1792) 2 Cox 312), but was most succinctly put by Lord Donaldson MR in United Bank of Kuwait Ltd v Hammoud supra, at 1066H: "... it is trite law that an agent cannot ordinarily confer ostensible authority on himself. He cannot pull himself up by his own shoe laces." Those same shoe laces, then, cannot bind the firm.

DUBAI ALUMINIUM CO LTD V SALAAM AND OTHERS, THE TIMES, 21 APRIL 2000 (COURT OF APPEAL) Whether partnership liable for partner's personal liability as constructive trustee.  A solicitor partner, Anthony Amhurst, was allegedly involved in a scheme to defraud the Dubai Aluminium Co Ltd ("Dubal") by means of a sham consultancy agreement. Settlement of the proceedings included a payment of $10 million on behalf of Mr Amhurst's partners in respect of Dubai's claim that they were vicariously liable for his part in the schemeunder section 10 of the Partnership Act 1890. As a term of the settlement agreement, Dubai's allegations against Mr Amhurst were withdrawn. In the subsequent contribution proceedings, Rix J held that, because Mr Amhurst's partners were personally innocent, they were entitled to a full indemnity from two other participants in the scheme, Mr Salaam and Mr A1 Tajir.  Two issues under section 10 were raised by the appeal. The first, a question of law, was whether the section applied at all in the case where the wrongful act or omission gave rise to a liability in equity for "wrongful assistance," as was alleged against Mr Amhurst here, rather than a liability in tort. The second, primarily a question of fact, was whether his alleged wrongful activities were undertaken "in the ordinary course of the business of the firm" as required by section 10.  As a matter of construction, the majority of the Court of Appeal held (Turner J dissenting) that the words "any wrongful act or omission" were wide enough to encompass all wrongful acts or omissions, affirming the decision of Rix J at first instance, and following Millett J in Agip (Africa) Ltd v Jackson [ 1991 ] 1 Ch 265. There was no reason to confine the words to wrongs classified as torts. Though there is some overlap between sections 9 to 13 of the Partnership Act 1890, section 13, which relates to improper acts by a partner who is a trustee, would not be rendered otiose if section 10 covered equitable claims. It was not without significance that the phrase "tort" was an established part of the Parliamentary vocabulary, at latest from 1867 (County Courts Act 1867 sections 5 and 10), yet the phrase used in section 10 was "wrongful" and not "tortious".

As to the second issue, the Court of Appeal held that Rix J had erred in failing to take account of the full ambit of the factual matters alleged. Turner J concurred on this matter with Evans LJ and Aldous LJ, who both identified matters that took Mr Amhurst's conduct outside the ordinary business of the firm. It did not follow, though, that there was any principle of law that a solicitor does not have implied or apparent authority to constitute himself a constructive trustee. Not every act that would make a solicitor a constructive trustee would be outside the ordinary course of his business. Rix J was accordingly right in declining to follow Vinelott J in Re Bell's Indenture [ 1980] 1 WLR 1217. It came down to the facts in each case.  Here, Evans LJ was persuaded by the fact that Mr Amhurst had given direct advice and assistance to participants such as Mr Al Tajir who, unlike Mr Salaam, were not his clients or clients of his firm. This was done in the context of the dishonest scheme to which they were all parties. These other wrongdoers could not have believed that Mr Amhurst was acting with the apparent authority of his partners, because they knew him to be acting dishonestly. Aldous J noted that Mr Amhurst had played a central role in the negotiations. Though merely drafting legal agreements could fall within section 10, it could not be part of the business of a firm of solicitors to plan, draft and sign sham agreements, giving effect to a scheme known to be dishonest.

Though this case took a rather unusual form - being a claim for contribution after settlement it required Mr Amhurst's partners to establish that his acts were in the ordinary course of business for them to be entitled to any indemnity - it provides welcome guidance on the vicarious liability of partners. In particular, it confirms that section 10 applies not just to torts, but to all wrongs committed by a partner in the ordinary course of business. In establishing that there is no principle that a solicitor who constitutes himself a constructive trustee is necessarily acting without the apparent authority of his partners, it also resolves the uncertainty surrounding Re Bell's Indenture.

Notwithstanding the Court of Appeal's finding that in the instant case Rix J applied too liberal an interpretation of section 10, the effect of this decision is to significantly widen the potential application of vicarious liability among partners.

LAWRENCE AND OTHERS V FARNDON AND OTHERS, 23 January 1998, Judge Rich QC, Chancery Division.

Validity of restrictive covenant.  Not so recent, but interesting nonetheless, this case concerned the five partners of a firm of solicitors in Leeds. Three of the partners ("the Lawrence partners") had expelled the remaining two partners ("the Famdon partners") under a no?fault expulsion clause. The validity of a restrictive covenant, one question out of a number of actions consolidated, was tried as a preliminary issue.  The relevant clause, which applied on the expulsion or voluntary retirement of any partner, prevented that partner from carrying on any business in competition with the partnership business for a period of two years from the succession date and within a radius of five miles of the partnership premises. The area excluded covered virtually all of the postal districts of Leeds, with a population of nearly 700,000 people. The Famdon partners argued that, to be valid, a covenant for restraint of trade must be fair and proportionate, as well as reasonably necessary for the protection of goodwill. Though they accepted the restraint would be reasonable if imposed upon a partner who had retired voluntary or been expelled for misconduct, they contended it was unreasonable when applied to a partner expelled without cause.  In Hensman v Traill, 15 October 1980 (unreported), Bristow J held that "there is a world of difference between imposing a restriction which prevents a partner who goes of his own free will or is got rid of for good reasons from setting up in competition next door, and imposing a restriction which enables you to banish him for no good reason." Rich J declined to follow Bristow J on the basis that that decision had been implicitly overruled by the Court of Appeal in Kerr and others v Morris [1986] 3 All ER 217. At page 225, Lord Justice Dillon said of that case:   "In my judgment it does not make any difference that the partner has, as the defendant has, bound himself to go in certain events in cl 32 and bound himself under the covenant in cl 34 if those events happened." The circumstances covered by those clauses included the power of the majority to expel a partner without good reason. 

In any event, Rich J considered that because the expulsion clause could be exercised against any of the partners, there was genuine mutuality between them. This was sufficient to bring the clause within the considerations accepted by the Privy Council in Bridge v Deacons [1984] 1 AC 705.  Whether a restriction is more than is necessary to protect the firm's goodwill will necessarily depend on the particular circumstances of the case. Here, Rich J found that the practice of the firm of a very large number of small cases, no more than 20 per cent each year being from existing clients, being drawn from all over the conurbation of Leeds. Nevertheless, this finding is a powerful indication of the lengths judges will go to in upholding restrictive covenants between partners, particularly where they are solicitors.

WENDOVER DEVELOPMENTS LTD AND ANOTHER V FISH AND ANOTHER, 23 November 1999, HHJ Thornton QC (Technology and Construction Court) - Whether a consultant had been held out to be, or was in fact, a partner. Partnership Act 1890, s. 14.

BECKMAN V COMMISSIONERS OF INLAND REVENUE [2000] STC (SCD) 59 (Special Commissioners) - Whether a retired partner had an interest in the partnership that was relevant business property for the purposes of the Inheritance Act 1984. Partnership Act 1890, s. 43.

MAILLIE V SWANNEY, 2000 GWD 6 233 - Deed provided for partnership to subsist from year to year after expiration of .fixed term. Whether a partner entitled to dissolve the partnership by notice expiring at the end of a year. Partnership Act 1890, s. 32(c).

FLYNN V ROBIN THOMPSON & PARTNERS (A FIRM) AND ANOTHER, The Times, 14 March 2000 (Court of Appeal) - Whether assault in, and later in the precincts of, a court, by a partner in a firm of solicitors on an opponent bringing an action against the firm was the act of a partner acting in the ordinary course of business of the firm or with the authority of his co-partners. Partnership Act 1890, s. 10.


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