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Case Studies in 2004



As one of the "Others" - RECENT PARTNERSHIP CASES

As one of the "Others", for me to write about the House of Lords' Appeal is like asking a patient to write about his operation. Malkin Janners was the classic unsuccessful merger. The combination of culture clashes and the early effects of the recession were too much to handle for partners accustomed only to success. Notice of Dissolution was given by effectively all partners to expire at end May 1991, but it became apparent that there was no economic justification for waiting so long. In order to stem continuing losses, nineteen of the twenty equity partners, with the conspicuous exception of Mr Hurst, entered into a Dissolution Agreement effective at 31 October 1990. Some partners re-formed under an abbreviated banner, others found alternative firms, while still others were offered a safety net by the successor firm.

Mr Hurst was in the fortunate position of obtaining an immediate salaried partnership with D J Freeman at a considerably higher salary than his previous equity partner drawings. For tactical reasons alone, he refused to sign the Dissolution Agreement, and accepted it as a repudiation by the other partners of the Partnership Agreement. Lord Millett made it quite plain, albeit obiter, that he did not by any means accept that a partnership could properly be ended in this way. However, as the point was not argued before him, he had to accept that there was indeed a repudiation, which was accepted by Hurst. Lord Millett's argument was based on the fact that partnership is a good deal more than a simple contract. He did not make the analogy, but it is in effect equivalent to a status. The other status to compare is that of marriage. Both are grounded in contract, but go well beyond it. Neither, if Lord Millett's remarks are to be accepted, can be terminated by the repudiation of the "wrongful" parties accepted by the "wronged" parties. This particular battle remains to be fought on another occasion. This was an opportunity lost.

Constrained as he was to accept that there was repudiatory conduct accepted by Mr Hurst, Lord Millett then considered what were the consequences arising in relation to the continuing debts of that partnership. He took the view that the so-called acceptance of a repudiation could not operate in any way different from the events taking place on a dissolution. These are, of course, governed by a combination of Sections 38 and 44 of the Partnership Act 1990.

Whatever the rights and wrongs between partners, simple creditor protection is involved. All creditors are entitled to look to all or any partners for repayment of money due. As between the partners themselves, the issue of payment and contribution is covered under the dissolution accounts. It is as simple as that. Whatever the rights and wrongs of the situation, an "innocent" partner has to pay his or her share of the continuing debts of the partnership. If an overpayment is made, then he is entitled to look for contribution. If an underpayment is made, conversely those over-paying are entitled to look to him for his contribution.

If the "wronged" partner can prove loss of income as a result of the wrongful repudiation of his fellows, then his action is quite a separate one in damages. Equally, if he can show that the dissolution has occasioned him loss which he would not otherwise have suffered, he is entitled similarly to damages. It is clear beyond doubt from the Judgment at first instance that the abbreviation of the dissolution period actually benefited all partners, Hurst included, as it reduced the ongoing losses. All the other Law Lords supported Lord Millett's Judgment, and Hurst's Appeal was dismissed with costs.

The issue of whether it is possible to terminate an ongoing partnership by accepting a repudiatory breach still remains to be settled. Such a situation has to be contrasted with one where a partnership is void ab initio, but that was not the case here. Their Lordships have clarified a potentially obscure area of Partnership Law, and they may have put an end to the repudiatory breach argument, but can we be sure?

Watch this space.

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