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Commercial Law - The End of a Wonderful Partnership?

By : Colm Nugent

 

The rights and obligations of a Partnership may fall upon parties to a business relationship, even without their knowledge, in light of a recent High Court decision.

 

Those who arrange their business relationships around a partnership agreement do so in the knowledge of the rights and obligations that imposes, and in particular their rights and obligations if the partnership ends acrimoniously. The House of Lords in Hurst v Bryk [2002] 1 AC 185 seemed to indicate that partners wishing to recover money from fellow partners were constrained by the need to take an account in equity after the partnership was dissolved. Partnership lawyers have sought to reconcile that statement of the law with the proposition in Lindley & Banks (18th Ed) which says “.. there is, in the current editor’s view no doubt as to his right to recover damages for breach of the partnership terms, including any duty implied by law1.”

 

The apparent tension between those two positions was considered by Mr Justice Tugdenhat, when he handed down initial judgement in the matter of Robert Beddow v Nigel Cayzer [2006] EWHC 557 (QB) earlier this year.

The case sparked press interest because of Mr Cayzer’s reputation as being one of the country’s leading financiers “and a member of the Cayzer financial dynasty” (Daily Telegraph 7.5.06). However, the case is also of considerable interest to those involved in partnership and ancillary issues because Mr Beddow, who was successful in his action, did not frame his claim as partnership dispute or seek an account or join all the partners to the partnership to the action. Notwithstanding this, the Court granted the Claimant’s declaration as to his entitlement to shares or their value, partly on the basis of the parties being involved in a partnership. A partnership in which there were no tangible assets.

The dispute arose when Mr Beddow approached Mr Cayzer’s brother with a business idea - to acquire and consolidate independent veterinary practices through a company, with a view to eventual float on the stock market.

Eventually, Mr Cayzer was instrumental in obtaining funding for a company called CVS (UK) Limited which according to Sovereign Capital’s website; who are CVS’ financial backers: “CVS was set up in August 1999 to participate in the consolidation of the veterinary industry through the incorporation of veterinary practices and services”.

This was a company in which Mr Beddow had no interest. Mr Beddow sought a declaration that Mr Cayzer held shares in CVS (or their value) on trust for him as a consequence of either an oral contract or a joint venture agreement. Mr Cayzer denied there was any legal business relationship or that Mr Beddow had any entitlement to anything, save that he acknowledged a ‘moral obligation’ which he had discharged by arranging for Mr Beddow to be offered 1.5% of the shareholding. Mr Cayzer, via his brother, initially believed the capital to find the business venture could be raised via their extensive network of overseas contacts. Despite those efforts, the anticipated funding was not obtained from those contacts and and Mr Cayzer turned to venture capitalists as the potential funding source. Mr Cayzer, alongwith the assistance of Andersen Consulting (as they then were).

The Venture Capitalists funding the CVS project offered Mr Cayzer the opportunity to acquire a percentage of the shares, which he declined but passed the opportunity to an off-shore entity. Mr Beddow was offered the opportunity to acquire 1.5% of the shareholding which he refused as being inadequate recognition of his efforts and idea.

The court determined that notwithstanding the fact Mr Cayzer acquired no shares personally, the opportunity he had been given to acquire 15% of the share capital was itself an asset of the joint venture. The Court determined that Mr. Beddow was thereby entitled to an equal share of the shareholding at Mr Cayzer’s disposal – despite the fact the Mr Cayzer’s opportunity was passed to a third party.

Because the Court decided that Mr Cayzer was in breach of his duty of good faith, in that he had taken over the running of the Joint venture project to the exclusion of Mr Beddow. Therefore, the court determined that Mr Beddow was entitled to damages by reason of the breach in accordance with the principles enunciated in Lindley on Partnership 18th Ed @ [16-08] “There can be no doubt that a breach of the duty [of good faith] will give rise to a claim for damages in the appropriate case.2

What is of particular interest to those involved in Partnership matters is that at no point had the parties themselves characterised the relationship as a partnership. There was nothing in writing. Notwithstanding that, the Court determined that there was a Joint venture which amounted, in this instance, to an agreement for a Partnership at Will with equal shares for the partners. This arose despite the Court being satisfied there was no contractual agreement between the parties to the action, because the terms were too vague to have amounted to a legally enforceable agreement.

The decision gave rise to the question whether the Claimant (Mr Beddow) could be entitled to payment of a sum of money save for equitable compensation for breach of trust. The Court considered that although the pleadings did not allege breach of trust the fact that the appropriate relief was not in the Particulars of Claim did not prevent the court from granting it.

The Court was satisfied that there was no actual conflict between the House of Lords decision in Hurst v Bryk [2002] 1 AC 185 and the proposition in Lindley and Banks on Partnership 18th ed (paras 16-08, 20-14, and 23-206 to 207) which the Court was satisfied was authority for the proposition that an action can be maintained between partners without taking a general account of all the partnership dealings and transactions. The court determined that whether or not that applies in any particular case will depend upon the circumstances and upon whether justice can be done without taking such an account. This was an available remedy whether or not an account is requested in either the Claim for or the Statement of Case or whether indeed partnership had even been pleaded.

It is therefore clear that tangible business relationships between parties which would ordinarily not be characterised as having the qualities of a partnership, may well be construed by the courts as being precisely that. The impact upon what otherwise appear to be loose arrangements involving joint ventures, vague contractual undertakings or simply understandings as to future conduct may be significant – and parties need to be advised accordingly.

Further information:

The case is now proceedings to a determination of quantum, following the declaration of Mr Justice Tugdenhat. The Defendant has applied for permission to Appeal to the Court of Appeal.

For the Claimant: Mr Nigel Jones QC and Mr Colm Nugent, both of Hardwicke Building, instructed by AR Legal Solicitors.

For the Defendant: Mr Stewart Adair, of 24 Old Buildings, instructed by SJ Berwin Solicitors.