- This
is a partnership case now proceeding in the Chancery Division. It started life
as an action in the Queen’s Bench Division. The claimant sought a money judgment
for the sum of £110,000 (with interest) which, she alleged, she had lent to the
defendants and was due for repayment. In their defence and counterclaim the defendants
denied that the relationship between the parties was that of creditor and debtor.
They contended that there was a partnership between the claimant and the second
defendant.
- The
judge (HHJ MacDuff QC) dismissed the claim for repayment of a loan. By his order
of 29 March 2001 he made a declaration that an equal partnership at will existed
between the claimant and the second defendant, that it commenced trading on 1
May 1999 and that it was dissolved on 29 September 1999. The order directed that
the affairs of the partnership should be wound up. He adjourned the taking of
all necessary accounts and enquiries to a Master of the Chancery Division.
- The
partnership in question was a retail pharmacy business, Ashworth’s Pharmacy, at
64 Ruislip High Street, which had been carried on by the second defendant as a
sole trader from 1986 until 1 May 1999, when the partnership commenced trading.
- In
the course of taking the dissolution accounts a disagreement arose about the correct
treatment in the accounts of the sum of £110,000, which the judge had held was
not a loan. A series of payments totalling that sum was made by the claimant into
the current bank account of Ashworth’s Pharmacy over a period of five months prior
to the commencement of trading by the partnership.
- In
his decision of 1 July 2002 Master Bowman read HHJ MacDuff’s judgment as deciding
that the payment of £110,000 was a capital contribution by the claimant to the
partnership. He accordingly struck out a claim by the second defendant, which
was contained in a witness statement in the proceedings for the account, that
the £110,000 had been paid to her by the claimant as the price for acquiring a
half share in the business and that she was entitled to use the purchase price
as she pleased.
- On
the second defendant’s appeal against Master Bowman’s striking out order Lloyd
J took a different view. On 26 September 2002 he allowed the second defendant’s
appeal. In his judgment the rule in Henderson –v- Henderson (1843) 3 Hare
100, which is designed to bring finality to litigation by requiring the
parties to bring forward their whole case in respect of the subject matter of
the litigation, precluded the claimant from denying that she had paid the total
sum of £110,000 to the second defendant as the purchase price for a half share
in Ashworth’s Pharmacy. Lloyd J’s ruling makes a significant difference to the
respective financial positions of the parties on the accounts. In the revised
dissolution accounts prepared by the second defendant as at 30 September 1999
the claimant was shown as owing over £43,000 to the second defendant, who was
treated as having introduced £110,000 capital into the partnership, even though
HHJ MacDuff had described the claimant in several passages of his judgment as
having made an "investment" of £110,000 in the business only months
before the partnership started trading. In these circumstances the claimant has
been allowed to bring a second appeal with the permission of Aldous LJ.
The
Facts
- The
hearing before HHJ MacDuff QC was the trial of the action. The parties gave oral
evidence. Findings of fact were made. The obvious starting point for the resolution
of the present dispute is the extempore judgment delivered on the issues identified
in the pleading of the claim and of the cross claim. The crucial question is:
what was the decision of the trial judge as to the basis on which the claimant
had paid £110,000?
- The
essential issue in the Queen’s Bench action was whether the legal relationship
between the parties was that of (a) lender and borrower or (b) partners. On that
issue it was for the second defendant, as the party alleging that there was a
partnership and counterclaiming for the winding up of its affairs, to plead the
facts relevant to its formation and the terms on which the partnership was entered
into. In paragraph 8(i) of the defence it was pleaded as an express term of the
partnership agreement that
"(i)
the claimant would pay the second defendant a sum of £110,000 to acquire a 50%
share of "Ashworth’s Pharmacy". The said sum was notionally attributed
in the following manner; £60,000 for good will [the second defendant had received
an offer of £120,000 for the goodwill of Ashworth’s Pharmacy in October 1998],
£30,000 for existing stock and £20,000 in a capital contribution towards half
of the costs of refitting the premises;
(ii)
that the claimant and the second defendant would share equally profits and losses
of "Ashworth’s Pharmacy"."
- In
the reply and defence to counterclaim the claimant denied such an agreement. She
alleged that, in discussions between the parties, she had made it clear that,
if she was to consider being involved in the business, she would need to be supplied
with information, such as 3 years’ accounts. That information was never provided
to her at any time. She also alleged that she had made it clear that, if she became
involved with the pharmacy business, it would be through a limited company and
the claimant’s equity in the company would be determined by the financial information
provided at the level of the claimant’s investment.
- There
was no express pleading by either side on the specific question as to how the
sums paid by the claimant into the current bank account of Ashworth’s Pharmacy
were to be dealt in the dissolution of the partnership, should the court hold
that there was a partnership. The dispute focused on the more general issue whether
there was a loan or a partnership. The determination of that issue was the focus
of the judgment.
- It
was perfectly possible for the parties to plead and argue the issue as to whether
there was a loan agreement or partnership agreement and for the judge to resolve
that issue, without the judge having to decide at that stage all the issues that
might arise between the parties in the dissolution of the partnership. In a partnership
action, especially where the partnership agreement was oral rather than by deed,
it is not uncommon for issues to arise on the taking of the accounts in the course
of winding up and for those issues to be directed to be tried in order to determine
the legal and factual basis on which the accounts should be taken.
- I
should now turn to the facts set out in the judgment of the trial judge. It is
only necessary to highlight the main facts. Many of them were never in dispute.
- From
late 1986 the second defendant conducted the business of Ashworth’s Pharmacy.
The claimant, who had been a close friend of the second defendant, was also a
dispensing chemist. In October 1998 the parties made an oral agreement. In broad
terms the agreement was that
"for
an investment into the business by the claimant of £110,000 she would be an equal
partner/owner/participant."
- Between
October 1998 and February 1999 the claimant paid the total sum of £110,000 in
the form of cheques and in one case in the form of bank transfer. All the cheques
and the bank transfer were made to the current account of "Ashworth’s Pharmacy."
The individual sums were paid as follows: £6,000 on 27 October 1998; £40,000 on
18 November 1998; £4,000 on 10 December 1998; £6,000 on 19 January 1999 and £54,000
on 18 February 1999.
- The
total sum of £110,000 was arrived at as a result of the second defendant putting
forward a valuation of the goodwill at £120,000 (the sum for which an offer had
been made in negotiations with a third party), a valuation of stock at £60,000
and the requirement of an injection of £40,000 for refurbishment. Those sums added
up to £220,000, which was then halved to produce the claimant’s contribution of
£110,000.
- At
the times when the oral agreement was reached and when the unsecured payments
were made by the claimant, Ashworth’s Pharmacy was in a "precarious financial
position." It was in danger of losing cosmetic agency contracts. It needed
an injection of capital into the business, in particular for refurbishment, which
went ahead in the early part of 1999 using the capital injected by the claimant.
- In
holding that the agreement was not a loan agreement, as alleged by the claimant,
but was, as alleged by the defendant, an agreement to pay money into the business
and become equal partners in Ashworth’s Pharmacy with trading to commence on 1
May 1999, the judge made it clear that he preferred the defendant’s evidence.
He found that the claimant was an unreliable witness. He accepted the defendant’s
evidence that the payments were not made by way of loan, but as an investment
as
"a
provision of capital for the purpose of buying herself into one half of the business."
- It
was, he held, an investment made by the claimant in a joint enterprise. A business
partner was required who " could inject some capital into the business"
which was in difficulty. The judge held that it was agreed that, as the business
developed, the second defendant and the claimant would draw a monthly sum of £750.
The £110,000 was treated by the claimant
"as
her payment for becoming a partner in a joint enterprise and never treated these
monies as a loan."
- The
judge concluded his judgment as follows:
"This
was, I hold, a partnership, was intended to be a partnership. It was never a loan.
A partnership was created and it follows that the claimant’s claim must fail,
must be dismissed, and there must be judgment for the defendants on the claim.
I think there must also follow a judgment on the counterclaim …"
The
Issue on the accounts
- The
issue on this appeal arose on the taking of the accounts. As directed by the Master
on 27 March 2002 the second defendant served a witness statement supporting a
dissolution account and the claimant served a witness statement verifying points
of dispute in respect of the dissolution accounts by the second defendant. In
her witness statement (paragraph 23) the second defendant stated
"I
had throughout this matter said that the relationship between the claimant and
I was that of a partnership. The sum of £110,000 paid by the claimant was for
the purchase of a 50% share of the business trading at the premises. The £110,000
paid by the claimant effectively belonged to me."
- Master
Bowman struck out that statement on the ground that the position contended for
in it was not correct. In his judgment the Master said
"However,
looking through the judgment and the portions of it which are relied upon by the
claimant and which are set out in the skeleton argument deployed on her behalf,
it would be difficult, I think, to reach the conclusion that the position contended
for on the part of the second defendant is correct. Everything the learned judge
has to say is directed towards the sum of £110,000 being an investment in the
partnership and not a sum paid outright to the second defendant to do with as
she would."
- The
Master’s reading of the trial judge’s judgment was, therefore, that the sum of
£110,000 paid by the claimant was contributed as an investment of a capital sum
by her in the partnership business. It did not belong to the second defendant
to do with as she wished.
The
Appeal to Lloyd J
- In
allowing the second defendant’s appeal, Lloyd J took a different view on the effect
of the judgment of the trial judge. He disagreed with Master Bowman. In his view
the Master should have reached the conclusion that it was not open to the claimant
to deny the assertion made by the second defendant in paragraph 23 of her witness
statement. On his analysis the claimant’s contention that she had invested a capital
contribution to the partnership was a new claim, which ought to have been raised
at the trial. The trial judge was asked to determine the terms of the agreement
made between the parties in October 1998 and whether the sum of £110,000 was paid
by the claimant in the context of a loan agreement or a partnership agreement.
If the point had been made at the trial, the judge could have decided, in holding
that there was a partnership, what the terms of it were concerning the £110,000.
The claimant had sought to raise, on the taking of the account, an issue, which
had been before the trial judge for decision, namely the basis of the payment
of the £110,000. The claimant’s case of the capital contribution to the partnership
was inconsistent with the terms pleaded by the second defendant in her defence
and accepted by the judge. There were no special circumstances which would make
it appropriate for the claimant now to raise this point. It would mean going back
over the evidence, which had already been given at the trial. After considering
the well known principle laid down in Henderson –v- Henderson Lloyd J concluded
in paragraph 86 of his judgment
"Accordingly,
it seems to me that the Master was wrong in his reading of the judgment. Indeed
the conclusion he should have reached is the opposite of the one he did reach,
namely, not just that it is open to the second defendant to advance the contention
which she does, but it is not open to the claimant to deny it."
Discussion
- My
first reaction on reading the judgments given in this litigation by HHJ MacDuff,
Master Bowman and Lloyd J was that Lloyd J’s analysis of the position was correct.
There was undoubtedly before the trial judge an issue as to the basis on which
the claimant paid sums totalling £110,000. The defence to the claim that it was
a loan repayable on demand was that the parties had agreed to enter into a partnership
on the terms pleaded. It was pleaded in paragraph 8(i) that it was an express
term of the partnership that the claimant would pay the second defendant the sum
of £110,000 to acquire a 50% share of Ashworth’s Pharmacy. There was an opportunity
for the claimant to plead in the reply and defence to counterclaim that the £110,000
was invested as a contribution to the capital of the partnership and not as payment
to the second defendant as purchase price for a half share in the business. That
could have been advanced by the claimant as an alternative case. It was not. The
claimant’s pleading was simply a denial that there was a partnership at all. Thus,
in a general sense, the claimant was seeking to raise on the taking of the accounts
a point which could have been raised at the trial, but was not. It can be argued
the principle of Henderson –v- Henderson ought to be available to the second
defendant to prevent the claimant raising a point, which she had not taken the
opportunity to raise when the loan/partnership dispute was tried by the judge.
- I
have, however, been persuaded by Mr Lord QC that Lloyd J’s conclusion is not correct.
There were three relevant possible readings of the trial judge’s findings as to
the basis of payment of the £110, 000. One was that he had decided the point in
favour of the claimant, as Master Bowman held. The second was that he had decided
the point in favour of the second defendant, as Mr Moraes contended on behalf
of the second defendant. The third was that the trial judge had not decided, and
did not need to decide, the loan/ partnership dispute in such a way so as to determine
the treatment of the £110,000 in the accounts. If that were the case then, subject
to the possible application of Henderson v. Henderson, the right course
would be to allow the appeal, for the evidence of the second defendant to stand
and for this court to say to say nothing which would preclude the claimant from
arguing before the Master on the taking of the account that the position was as
she contended, namely a capital contribution.
- In
my judgment, the trial judge did not in fact decide either that the sum of £110,000
was paid by the claimant to the second defendant solely by way of purchase price
for the acquisition of half share in the partnership or that the £110,000 was
paid exclusively by way of a capital contribution to the partnership, which should
be shown on the accounts as a sum due to the claimant.
- The
crucial question is what was the claimant paying the £110,000 for? It seems to
me that the judge regarded the payment as serving two purposes, neither of which
was a loan: first, it was the provision of capital to the partnership to be used
in the business for refurbishment of the premises; secondly, it was part of the
deal that the claimant would become an equal partner in the business with the
second defendant and acquire an half share in it. Those findings were sufficient
to dispose of the claim that the payment was by way of loan and to conclude that
there was a partnership agreement between the claimant and the second defendant.
- How
should the sum of £110,000 be dealt with in the accounts? That point was not canvassed
before the trial judge in the pleadings or in the submissions. It was not decided
by him. It was unnecessary for him to decide the point at that stage. Nothing
he said concluded the matter clearly one way or the other. It was an issue which
could properly be raised when the accounts came to be taken.
- In
those circumstances this appeal should be allowed. There was no decision by HHJ
MacDuff on the proper treatment of the payment of the £110,000 in the taking of
the partnership accounts of Ashworth’s Pharmacy. The claimant is not precluded
by his judgment or by the rule in Henderson v. Henderson from contending
that the sum was not paid by her to the second defendant to do with as she pleased.
- The
matter should be remitted to the Master to determine the following issues in the
taking of the account, which is fixed for hearing by Master Bowman on 2 and 3
July 2003 :-
(1)
whether, notwithstanding the declaration contained in the order of HHJ MacDuff
dated 29 March 2002 that an equal partnership at will existed between the claimant
and the second defendant which commenced trading on 1 May 1999 and was dissolved
on 29 September 1999, the capital shares of the partners were equal or unequal
and, in either case, their amount as at the commencement of trading and the date
of dissolution of the partnership;
(2)
whether the profits and assets of the partnership are to be distributed, or its
losses paid, in equal shares or on some other, and, if so, what basis.
Lord
Justice Dyson
- I
agree. I wish to add a few words of my own to explain why the principle of Henderson
v Henderson [1843] 3 Hare 100 does not apply in the present case. The principle
has usually been applied where A litigates with B to judgment, and then starts
fresh proceedings against B raising a case which could and should have been raised
in the first proceedings. As Lord Bingham of Cornhill said in Johnson v Gore
Wood [2002] 2 AC 1, 30A the public interest which underlies the principle
is there should be "finality in litigation and that a party should not be
twice vexed in the same matter". What is unusual about the present case is
that the judge held that the principle applied in relation to separate stages
of the same litigation.
- The
judge said that the claimant ought to have raised her contention as to the basis
on which the £110,000 was paid (on the footing that it was not a loan) "if
at all at the earlier stage when the witnesses were before the court giving evidence.
The court could have come to a conclusion on all issues when deciding the question
of loan or partnership and if it had been raised, the further issue, if partnership,
then on what terms?" (para 81). He added (para 83) that if the claimant were
permitted to raise the point now, this would allow her to "open the same
subject of litigation in respect of the matter which might have been put forward
as part of the subject in contrast (sic), but that was not put forward at the
trial". There were "no special circumstances…. such as to make it appropriate
to allow the point to be raised again" (para 85).
- These
excerpts show clearly that the judge was applying the precise words used by Sir
James Wigram V-C in the classic passage at pp 114-5 of his judgment in Henderson
v Henderson. But the scope of the rule in Henderson v Henderson was
explained and amplified by Lord Bingham in Johnson v Gore Wood. At p31C,
he said:
"…
and there will rarely be a finding of abuse unless the later proceeding involves
what the court regards as unjust harassment of a party. It is, however, wrong
to hold that because a matter could have been raised in earlier proceedings it
should have been, so as to render the raising of it in later proceedings necessarily
abusive. That is to adopt too dogmatic an approach to what should in my opinion
be a broad, merits-based judgment which takes account of the public and private
interests involved and also takes account of all the facts of the case, focusing
attention on the crucial question whether, in all the circumstances, a party is
misusing or abusing the process of the court by seeking to raise before it the
issue which could have been raised before. As one cannot comprehensively list
all possible forms of abuse, so one cannot formulate any hard and fast rule to
determine whether, on given facts, abuse is to be found or not. ….. Whilst the
result may often be the same, it is in my view preferable to ask whether in all
the circumstances a party’s conduct is an abuse than to ask whether the conduct
is an abuse and then, if it is, to ask whether the abuse is excused or justified
by special circumstances."
- In
my view, the judge applied the rule too rigidly. He failed to adopt the "broad
merits-based judgment" to which Lord Bingham refers, and failed to ask the
question whether in all the circumstances the claimant was misusing or abusing
the process of the court by seeking to raise the issue as to the basis on which
the £100,000 was paid on the footing that there was a partnership. It is not enough
simply to say that the issue could have been raised at the earlier stage, and
that there are no special circumstances which justify permitting the issue (exceptionally)
to be raised at the later stage.
- There
was no abuse in the present case. It is true that there was no order for the trial
of a preliminary issue as to whether there was a partnership at all. But the hearing
before Judge MacDuff QC was in fact restricted to this issue. Neither party addressed
evidence or argument which was directed specifically to the question of the terms
of the partnership. And despite the fact that there are passages in the judgment
of Judge MacDuff QC in which he appears to be dealing with the basis on which
the £110,000 was paid, I am satisfied that he did not in fact decide that issue.
It would have been possible to include in the issues to be determined by the judge
the question of the basis on which the £110,000 was paid, on the footing of partnership.
The inclusion of that question would have presented the claimant with forensic
difficulties, since her primary case was that there was no partnership at all.
Be that as it may, it seems that neither party asked the court to take this course.
- It
was obvious that, if the court were to find that the relationship between the
parties was one of partnership, and there were to be a taking of accounts, a number
of issues might arise which, if not compromised, might necessitate a further hearing
and evidence. These might have included the terms of the partnership itself. The
question of what to include in the trial before Judge MacDuff QC was essentially
a matter for case-management.
- There
is this further problem with the decision of Lloyd J. If the claimant ought to
have raised before Judge MacDuff QC her contention as to the basis on which the
payment was made, then so too ought the second defendant. Why should the claimant
be the only party precluded on the taking of the accounts from raising her contention
as to the basis on which the payment was made? If the judge is right, then surely
the second defendant is in the same difficulty as the claimant. But if that were
right, then one would reach the absurd situation that neither party would be allowed
to put forward her contention as to the basis on which payment was made. In my
view, this merely serves to underline that this was not a case of abuse of process
at all.
- For
these reasons, as well as those given by Mummery LJ, I would allow this appeal.
Lady
Justice Arden
- I
agree that HHJ MacDuff QC did not decide the terms on which the sum of £110,000
contributed by the appellant was to be treated in the partnership accounts of
Ashworths Pharmacy. The importance of that issue in the winding up of the partnership
is unlikely to have been appreciated at that stage. Accordingly this appeal must
be allowed and the matter remitted to the Master to determine the issues set out
in the judgment of Mummery LJ. Both parties agreed during the hearing of the appeal
that, if the appeal was allowed, those were the issues to be remitted. There may
well be other issues that need to be determined as well.
- I
further agree with the reasons set out in both the judgment of Mummery LJ and
that of Dyson LJ. While it may be unusual to apply the principle in Henderson
v Henderson in relation to separate stages of the same litigation, it is not
conceptually impossible. The issue before HHJ MacDuff QC could, for instance,
have required him to determine the proportions in which the partners were entitled
to share in the surplus assets of the partnership. If the judge had been asked
to determine that issue on the basis that the parties had agreed that the appellant’s
share of surplus assets should be that proportion which her contributions bore
to the total value of the partnership assets and on the basis that her contributions
for this purpose were part only of the sum of £110,000, it seems to me that the
principle in Henderson v Henderson would be capable of being invoked if
on the taking of the partnership accounts after judgment the claimant sought to
argue that the balance of that sum ought also to be taken into account in determining
her entitlement to surplus assets.
- However,
with hindsight at least, the issues before HHJ MacDuff QC should have been precisely
defined. If they had been so defined, almost certainly the delay and costs that
have been fruitlessly spent since his judgment in seeking to establish what was
actually decided by him would have been avoided. That waste of time and costs
is highly regrettable. In my judgment, the parties must now set their minds to
co-operating with the court to ensure that these proceedings are brought to a
swift, economical and just conclusion.
- In
future disputes as to the existence of a partnership, the parties and the trial
judge should bear in mind the point which this appeal illustrates, namely the
possibility that a dispute may arise on the taking of accounts as to what was
decided by the court when dissolution was ordered. It may be impossible to foresee
all the issues which ultimately arise in the taking of accounts, but the most
practical way of avoiding the risk to which I have referred is likely to be case
management of the dispute as to the existence of the partnership. At that stage
the opportunity can be taken to debate the issues which the parties agree should
be decided on that occasion.