OUTER HOUSE, COURT OF SESSION

 

[2010] CSOH 147

 

A919/08

 

 

 

 

 

 

 

 

 

 

 

OPINION OF LORD BANNATYNE

 

in the cause

 

CHARLES WILLIAM PAGAN and OTHERS

 

Pursuers;

 

against

 

JOHN BERNARD CLARKE and ANOTHER

 

Defenders:

 

 

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Pursuer: D. Thomson; Brodies LLP

Defender: S. Wolffe Q.C.; Simpson & Marwick

 

9 November 2010

 

Introduction

[1] This matter came before me for a Procedure Roll discussion on the motion of both parties. They each insisted upon their preliminary pleas at the Procedure Roll. The preliminary pleas of both parties were directed to the relevancy and specification of the other side's averments.

 

Background
[2] The pursuers sought payment from the defenders in terms of a Minute of Agreement, number 6/20 of process (hereinafter referred to as "the Agreement"). The pursuers sought payment in terms of Clause 7 of the Agreement which made provision for certain payments to be made and the calculation thereof. In terms of Clause 7(c), any payment to be made thereunder was predicated upon ascertaining the correct figure for PBL Capital and it was that figure and how it had been calculated in terms of the Agreement which was in dispute between the parties. PBL Capital is the aggregate of two matters, one of which is "the work in progress of the Firm at the Retirement Date" and it was in relation to the proper construction of that phrase that parties joined issue.

 

The Issue

[3] The primary issue before me at the Procedure Roll was the proper construction of the Agreement, it being the defenders' contention that the pursuers' claim was based on a material misconstruction of the Agreement and in particular of the phrase above referred to. There were certain secondary matters argued on behalf of the pursuers and I will detail these later in my Opinion.

 

The Factual Context of the Entry into the Minute of Agreement
[4] The pursuers and defenders are all solicitors. They were all, prior to the entry into the Agreement, together with David Patrick Patullo, Alison Thomson Green, Susan Margaret Duff and Carolyn Ann Wilson in partnership together trading under the name Pagan Osborne. The defenders and Carolyn Ann Wilson decided to retire from Pagan Osborne. It was the intention of the said three partners, the outgoing partners (hereinafter referred to as "the PBL Partners") to enter into practice together under the name CCW LLP. Following upon the retiral of the PBL Partners, it was the intention of the rest of the partners, hereinafter referred to as the PO Partners, to continue trading as Pagan Osborne. That in order to achieve this certain parts of the firm Pagan Osborne would pass in terms of the Agreement to the PBL Partners and the rest would remain with the PO Partners. The foregoing was known to all parties when they entered into the Agreement. As a result of the foregoing, the Minute of Agreement was entered into and the parties to the Agreement were the PO Partners; the PBL Partners and CCW LLP.

[5] There were at all material times five broad sectors of activity carried on by Pagan Osborne. The first of these was the provision of legal services. There were four other sectors of activity:

1. Sinclair Osborne Financial Services Limited;

2. St. Andrew's Asset Managers;

3. Pagan Osborne Property Services; and

4. Pagan Independent Financial Advisors.

These last four sectors of activity are hereinafter referred to as "the non-legal sectors".

[6] In relation to the non legal sectors, Pagan Osborne did not operate a time recording system. In relation to the legal services part of the firm, a time recording system was operated. That this was the position was known to all parties to the Agreement at the time of the entry into the Agreement.

 

The Material Clauses in the Agreement
[7] The preamble to the Agreement is in the following terms:

"Whereas

i The parties hereto have practised for some time together and with others as solicitors in the partnership under the law of Scotland with the firm name 'Pagan Osborne' in Cupar and elsewhere;

ii The PBL Partners have resolved to retire from the partnership and commence trading together, after the Retirement Date, with the firm name CCW; and

iii The parties hereto have agreed upon the terms and conditions upon which the PBL Partners will retire from the partnership and that the terms of their agreement should be recorded in writing."

The following terms were defined:

"'The Firm' means the firm of Pagan Osborne, Solicitors, as constituted immediately before the Retirement Date."

"'The Partners' means the whole partners of the Firm immediately prior to the Retirement Date, and includes the personal representatives of any of the Partners."

"A 'PBL Capital Balance' means that sum which is certified by the Accountants to be due to or by a PBL Partner as at the Retirement Date after reconciling his capital, current, tax and other accounts within the Firm at the Retirement Date and including his interest in the undistributed profits of the PO Companies, other than Sinclair Osborne Financial Services Limited."

"'The PBL Capital' means the aggregate of (a) the PBL Capital balances and (b) 30% of the sum by which the work in progress of the Firm at the Retirement Date (including that in relation to all Partners' time and work) valued, on the basis of the full selling price of the time recorded or work done in relation to any matter exceeds the work in progress of the Firm shown in the Accounts."

Clause 2, which related to retirement and the firm name, included inter alia the following:

"i The PBL Partners shall retire from the Firm at and with effect from the Retirement Date and will be entitled to carry on the PBL Practice as transferred to them pursuant to this Agreement.

ii The PO Partners will continue the PO Practice as and from the Retirement Date and the Firm will not be dissolved by the retirement of the PBL Partners."

Clause 6, which relates to work in progress, contains, inter alia, the following:

"(c) As soon as practicable after the Retirement Date, the whole work in progress of the Firm as at the Retirement Date (including that in relation to all Partners' time and work) shall be valued, on the basis of the full selling price of the time recorded or work done in relation to any matter."

Clause 7, which deals with the issue of consideration, contains inter alia the following:

"The PBL Partners will, in consideration of the acquisition by them of the PBL Practice and the further benefits enjoyed by them pursuant to this Agreement, make the payments specified in sub-clauses (a)-(d) below, in addition to any other payments provided for in any other clause of the Agreement:

(a) On 3 November 2003, by bank transfer to PO's bank account, the sum of (i) г36,450 in respect of the PBL Assets; and (ii) г29,260.94 in respect of the PBL Debtors listed in Schedule 3 hereto;

(b) On 30 November 2003, the sum by which 87.5% of the value of the PBL Work in Progress at the retirement date exceeds г105,000;

(c) On 31 January 2004, or within one month of the date of the approval of the Accounts, if later, the sum by which 87.5% of the value of the PBL Work in Progress exceeds the PBL Capital, but under deduction of the sum if any paid pursuant to sub-clause (b) of this clause;

(d) On the date on which the payment is due to be made or received by the PBL Partners for the PBL Work in Progress pursuant to sub-clauses (c) or (e) of this clause, the sum certified by the Accountants as due in terms of clause 9(ii) hereof, if payable by the PBL Partners, in addition to a sum payable in sub-clause (c).

...

(h) Payment of any sum due to be paid by the PBL Partners or the PO Partners pursuant to this clause, or otherwise payable in terms of any other provision of this Agreement; or pursuant to the Support Agreement, will be paid in full on the date specified as the date of payment and no right of retention or set-off will be available to the party liable to pay, and no such claimed right will entitle the party liable to pay to withhold payment of any such sum (save that in calculating the payment to be made to or by the PBL Partners pursuant to sub-clauses (c) or (e) of this clause the paying group of Partners may set-off any sum payable to that group of Partners pursuant to the Accountant's certificate in terms of Clause 9(ii))."

Clause 9 relative to accounts and profit states inter alia as follows:

"i As soon as practicable after the Retirement Date the Accountants will be instructed to prepare the Accounts and to certify the PBL Capital Balances. The Accounts will be prepared on the basis upon which the accounts of the Firm are normally prepared. The Partners will co-operate in all respects with the Accountants so as to enable the Accounts to be prepared as expeditiously as possible."

Clause 22 relative to dispute resolution provides inter alia:

"(b) A dispute relating to the valuation of any non time-charged item of work in progress will be determined by Alex Quinn Law Accountant acting as an Expert whose decision shall be final.

...

(d) A dispute relating to the Accounts or Profits or time charged work in progress will be determined by a Chartered Accountant agreed by the parties or failing agreement nominated by the President of the Institute of Chartered Accountants of Scotland as Arbiter."

Lastly, Clause 24 provides as follows:

"This Agreement and any documents executed by the parties or on their behalf of even date with this Agreement constitute the entire agreement among the parties and, so far as the Partners are concerned, supersede the Partnership Agreement and all other agreements among them."

 

Submissions on behalf the Defenders

[8] In terms of the defenders' Note of Argument it was first contended that the pursuers' action was premature, however, this line was not insisted upon in the argument before me.

[9] In the course of the submissions made to me by senior counsel her contention became this: that on a proper construction of the Agreement the calculation of any sum payable by the PBL Partners to the PO Partners in terms of Clause 7(c) of the Agreement requires to take into account the non-time-charged work in progress of all sectors of activity of the firm including the non-legal sectors. She submitted that the pursuers' averments did not proceed on said construction and were therefore misconceived and irrelevant. Rather the pursuers' construction was to the effect that no account should be taken of non-time-charged work in progress arising from the non-legal sectors.

[10] She then sought to elaborate upon that broad submission. Clause 7 of the Agreement is headed "Consideration". That Clause deals with how the consideration to be paid by the PBL Partners to the PO Partners "for the acquisition by them of the PBL Practice" is to be calculated. In particular, Clause 7(c) directs that the calculation is to be carried out by reference inter alia to the "sum by which 87.5% of the value of the PBL Work in Progress exceeds the PBL Capital" which in terms of the Agreement is a defined term. PBL Capital is defined as the aggregate of two matters:

"(a) The PBL Capital balances and (b) 30% of the sum by which the work in progress of the Firm at the Retirement Date (including that in relation to all Partners' time and work) valued, on the basis of the full selling price of the time recorded or work done in relation to any matter exceeds the work in progress of the Firm shown in the Accounts."

[11] She advised that it was in relation to the second part, i.e. part (b) of the said definition of PBL Capital that the parties primarily joined issue in relation to the issue of construction. In particular the construction of the following phrase: "work in progress of the Firm at the Retirement Date" was the principal matter in dispute. "Work in progress of the Firm at the Retirement Date" was not a term which was defined in the Agreement. The defenders' contention was that on a proper construction of that phrase the non-time recorded work in progress was included. There was no dispute that the non-time recorded work in progress related to the non-legal sectors of the Firm's business. The construction contended for on behalf of the pursuers was that such work was not included.

[12] Senior counsel then turned to examine the definition of the PBL Capital at page 2 of the Agreement and in particular the second part thereof from "(b)". She began by stressing that there were no words of limitation attached to the phrase "work in progress of the Firm at the Retirement Date". She submitted that the absence of such limiting words showed that the clear intention of the parties to the Agreement was that all of the work in progress of the Firm should be had regard to. There was no indication that the work in progress of the non-legal sectors was to be excluded when considering work in progress of the Firm at the Retirement Date. She submitted that it would have been a simple matter, had it been the intention of the parties, that work in progress in the non-legal sectors should be excluded from the phrase, to make that clear. The parties had not done so.

[13] She also placed emphasis on the fact that the word "Firm" as used in the definition began with a capital letter. This she submitted was a reference back to "the Firm" as defined at page 1 of the Agreement. The definition of the firm was in no way limited and clearly included within it the entirety of the firm. Thus it was her position having regard to the definition of the Firm that what was being referred to when that word was used in the definition of PBL Capital was the whole firm and not merely some part of the firm which excluded the non-legal sectors. The non-legal sectors at the time of the retirement constituted part of the firm business and about that there was no dispute. Thus it was her position that on a proper construction of work in progress of the Firm at the Retirement Date, as that phrase was contained within the definition of PBL Capital, it included the work in progress of the non-legal sectors, i.e. the non-time recorded work in progress.

[14] It was senior counsel's position that considerable support for her position as to the proper construction of work in progress of the Firm at the Retirement Date could be found in the wording of Clause 6(c) of the Agreement. She placed particular reliance on the terms of the first sentence thereof which is in the following terms:

"As soon as practicable after the Retirement Date, the whole work in progress of the Firm as at the Retirement Date (including that in relation to all Partners' time and work) shall be valued, on the basis of the full selling price of the time recorded or work done in relation to any matter."

[15] Senior counsel then proceeded to subject the said sentence to detailed analysis. She first pointed to the breadth of the language used in the said first sentence of the Clause. She relied on the use of the word "whole" which appeared immediately before the words "work in progress". She submitted that the use of the said word clearly indicated that what was to be taken account of was not part of the work in progress of the Firm but rather the complete work in progress of the Firm.

[16] Senior counsel for the defenders submitted that it was perhaps unnecessary for the word "whole" to appear before the words "work in progress" in order to show the intention of the parties was that the entire work in progress was to be taken account of. However, its presence established beyond doubt that what was intended by the parties to the Agreement was that the entire work in progress should be taken account of and not only part of the work in progress.

[17] Senior counsel submitted that if there was any doubt as to the proper construction of work in progress of the Firm as at the Retirement Date then this was set aside by the phrase which appeared at the end of said sentence, namely: "time recorded or work done in relation to any matter". She again emphasised the breadth of the language and submitted that no part of the work in progress could be excluded given the use of that phrase.

[18] Counsel went on to submit that use of the words "the Firm" in the Clause further supported her submission as to the proper construction for the same reasons as she had advanced when looking at the use of those words within the definition of PBL Capital. She submitted that the use of the words "the Firm" throughout the agreement referred to the whole interest and assets of the firm and nowhere in the Agreement did these words refer to less than that totality. She submitted that this again pointed to the inclusion of the non-time recorded work in progress of the non-legal sectors within the phrase "work in progress of the Firm at the Retirement Date".

[19] Senior counsel then turned to look at the terms of Clause 9 of the Agreement and accepted that in terms thereof the accounts of the firm were to be prepared on the basis upon which the accounts of the firm were normally prepared. She did not dispute that the accounts prepared on that basis did not include a valuation of partners' time and work. She noted both in the definition of PBL Capital and in Clause 6(c) that "work in progress of the Firm as at the Retirement Date" was said specifically to include that in relation to all partners' time and work.

[20] However, she rejected any argument that in the second part of the calculation of PBL Capital (i.e. part (b)) the only difference between 30% of the work in progress of the Firm at the Retirement Date and work in progress of the Firm shown in the Accounts would be a valuation of partners' time and work. It was her position that that was not a proper construction. She submitted that if that had been the intention of the parties, the word used immediately before the phrase "that in relation to all Partners' time and work" would not have been the word "including", which was a non-exhaustive word.

[21] Senior counsel pointed to the consistent use of the phrase "the Firm" and "work in progress of the Firm as at the Date of Retirement" throughout the Agreement and submitted that this was a further factor which pointed in favour of her construction.

[22] Senior counsel then turned to examine the issue of the purpose of the Agreement. She submitted that the clear purpose or objective of the Agreement could be seen in the preamble at page 1(iii) which was in the following terms:

"The parties hereto have agreed upon the terms and conditions upon which the PBL Partners will retire from the partnership..."

Thus she submitted that the Agreement's purpose was to deal with the retiral of the PBL Partners and, in so doing, to divide the entire assets and liabilities of the firm in a particular way. Or, looked at another way, the purpose was to work out what the PBL Partners took with them of the firm and what was to remain with the PO Partners and thereafter to calculate a balancing figure having regard to the entire assets and liabilities of the Firm. She described what was being done in the Agreement as being the disaggregation of the assets of the firm on the retiral of the PBL Partners. She submitted that support for that position could be found when regard was had to the entire landscape of the Agreement and the whole Clauses thereof.

[23] Turning to look at the construction which was contended for by the defenders, she argued that this construction had the effect that the PBL Partners gave up their right to 30% of the work in progress of the non-legal sectors. She submitted that this result ran entirely counter to the purpose of the Agreement which she had identified. In addition, such a result, for the reasons she had already advanced, ran counter to the clear wording of Clause 6(c) and the definition of PBL Capital.

[24] She submitted that the defenders giving up their 30% interest in the work in progress of the non-legal sectors where they had an interest in the whole firm would be an extraordinary result to arrive at in the absence of a clearly expressed intention within the Agreement to arrive at that result, which she submitted did not exist.

[25] She accepted that the purpose of the Agreement was not dissolution. Clause 2.ii expressly stated that the firm was not dissolved. However, she submitted that the purpose she had identified of disaggregation broadly achieved the same purpose as a dissolution so far as division of assets and liabilities was concerned.

[26] Senior counsel referred me to the case of Bennett v Wallace 1998 S.C. 457. In that case, which dealt with a dissolution of a partnership the court held as follows:

"that it was inherent in the nature of a partnership that all assets brought into the partnership should be included in the accounting between the partners both at the start and at the end of their relationship, unless there was some agreement to the contrary."

Senior counsel took from this case that at the end of a partnership the starting point was that all assets should be taken account of in the absence of some agreement to the contrary. She submitted that there was no agreement to the contrary here.

[27] She stressed that she was not referring to this case in order to set up some argument regarding the construction of the contract based on the concept of equity or fairness. What she was asserting was that on a proper construction of the Agreement it could not be said that the terms of the Agreement were such that the work in progress of the non-legal sectors was excluded. Rather the proper construction was that the purpose of the Agreement was the disaggregation of the whole assets of the firm including the work in progress of the non-legal sectors which should be taken into account.

[28] Additionally senior counsel argued that Article 22 of the Agreement relative to dispute resolution was of some assistance in arriving at a proper construction of the Agreement.

[29] Lastly she submitted that it underlay the pursuers' position anent construction that it was really unworkable to carry out a valuation of work in progress where there was no time recording in place. She made three points regarding this:

1. It was never submitted by counsel for the pursuers that it was impossible to carry out such a valuation so as to frustrate any particular Clause of the Agreement.

2. She accepted that valuation may be more or less precise depending on the data available for use as a basis for the valuation. She accepted it might be the case that the valuation of the work in progress of the non-legal sectors may be less precise because of first the lack of time recording and, secondly, the nature of these businesses. However it did not follow that this supported any argument of the pursuers that such work in progress should not be included for the purposes of calculating the PBL Capital.

3. Moreover, in Clause 22(b) a mechanism was provided for the valuation of non-time-charged work in progress. This again showed the parties intended that non-time-charged work in progress should be included as part of the assets of the firm and should be valued.

For the foregoing reasons senior counsel submitted that certain of the averments made on behalf of the pursuers should be excluded. It was her position that if these were excluded that the pursuers did not have a relevant case and that it flowed from this that the action should be dismissed. It was not disputed by counsel for the pursuers that if I excluded these averments having preferred the defenders' construction then the action fell to be dismissed as irrelevant.

 

The Submissions made on behalf of the Pursuers

[30] The broad contention of the pursuers relative to the construction of the contract came to this: on a proper construction of the contract "work in progress of the Firm at the Retirement Date" where it appears in the Agreement and in particular in the definition of the PBL Capital excludes the work in progress of the non-legal sectors, namely: the non-time recorded work in progress.

[31] Counsel observed at the outset that the only contextual issue upon which he placed reliance was the way that the accounts of the firm were usually made up. This submission was made under reference to Clause 9(i). These accounts he submitted had first historically not included a figure in relation to partners' work and time and, secondly, historically had never included non time-recorded work in progress from the non-legal sectors. Thus he submitted that the items which the defenders were seeking to have account taken of had never previously been taken into account. This meant that work in progress was to be valued in some new way to that which had hitherto been adopted. This was not on a proper construction the intention of the parties.

[32] Further, under reference to this issue of how the accounts of the firm had previously been prepared, he argued that what underlay part of the argument on behalf of the defenders was an assertion that the pursuers' position was this: the only relevant assessment of work in progress was the figure contained in the accounts. He accepted that if that were the pursuers' position, then the definition of the PBL Capital would be meaningless as the calculation of the figure for work in progress of the Firm at the Retirement Date in sub-clause (b) of the definition would be the same as the figure for the work in progress of the Firm shown in the Accounts. That result would he accepted render the latter part of the definition meaningless. However, he stressed that that was not the pursuers' position, rather the pursuers' position was truly this, that the work in progress of the Firm shown in the Accounts did not include partners' time and work and in terms of the definition of PBL Capital that was expressly to be taken into account when work in progress of the Firm at the Retirement Date was calculated. Therefore there was a difference between work in progress of the Firm at the Retirement Date and work in progress of the Firm shown in the Accounts on the basis of the construction put forward on behalf of the pursuers and therefore it could not be said that their contention rendered part (b) of the calculation of PBL Capital otiose and the definition thus meaningless.

[33] Counsel then went on to submit that the construction contended for by the defenders was wrong in that no value could be placed on the work in progress of the non-legal sectors first in that it was not time recorded and secondly given the nature of the work that was to be valued. He gave an example of why he said no value could be placed on such work due to its nature. He submitted that, if in relation to the provision of financial services advice had been given as to the purchase of certain financial products. However, those products had not yet been purchased, then no value could be placed on this work as it was uncertain that the customer would purchase the financial products, thus resulting in a fee to the firm.

[34] Counsel immediately recognised that in the absence of hearing evidence, the above argument might very well be a difficult one for the court to rule on. He submitted that if the court was in doubt on this particular issue the appropriate course would be to allow a proof before answer.

[35] Counsel then went on to look at what he characterised as the underlying assumption upon which the defenders' whole argument on construction was based. He submitted that the assumption was this: the purpose of the Agreement was that the PBL Partners should get their full value for their interest in the firm or, put another way, that the purpose of the Agreement was that there should be a fair sharing of the parties' interests in the firm. He submitted that it was clear from various parts of the defenders' pleadings that this was the case, however, he submitted that this was shown most clearly at page 17D-E of the Closed Record which is in the following terms:

"The accounts of the Partnership were prepared on the basis of an ongoing business. WIP of some sectors of activity carried on were not booked into the accounts. However, this nonetheless required to be valued for tax purposes every year. It is precisely because the accounts did not include all of the WIP generated by the activity of the partners of the Partnership in all sectors of work undertaken, i.e. that of the Non-WIP Businesses (as defined by the Pursuers), that a mechanism was required to enable the Pursuers to retain, and the Defenders to be paid, their respective shares of the full value of the WIP not included in the annual accounts."

In addition, he submitted that the reference to Bennett v Wallace clearly illustrated that this was the approach of senior counsel for the defenders. That case related to a dissolution and was of no relevance to the present case in that it was expressly stated in the Agreement that no dissolution was to take place.

[36] He accepted that if one approached the Agreement with the purpose in mind contended for by the defenders' counsel, that one might very well reach the conclusion that the defenders' construction should be preferred. However, he submitted that the purpose identified by senior counsel for the defenders, on a proper construction of the Agreement, was not the purpose of the Agreement.

[37] That the Agreement was not intended to produce a fair sharing of the assets of the partnership he submitted was shown first by the fact that the Agreement specified there was to be no dissolution and, secondly, by the terms of Clause 24, which was to the effect that the Partnership Agreement was expressly superseded. Thus he submitted the Agreement in its clear terms ruled out the idea that one should approach it on the basis that it was designed to achieve a dissolution. It also ruled out the approach that one could have any reference to the Partnership Agreement or to the terms of the Partnership Act 1890 and thereby produce a fair sharing of the assets of the Firm. Thus any intention of the parties to achieve a fair sharing of the assets of the partnership was ruled out.

[38] Counsel went on to identify what he said was the purpose of the Agreement. He characterised the purpose of the Agreement as this: the enabling of the acquisition of certain things by the PBL Partners for a price which was to be paid to the PO Partners. He submitted that this was clearly shown by the terms of Clause 7 of the Agreement which was to the effect that:

"The PBL Partners will, in consideration of the acquisition by them of the PBL Practice and the further benefits enjoyed by them pursuant to this Agreement, make the payments specified in sub-clauses (a) to (d) below."

He submitted that the terms of this Clause fitted in with his broad submission as to the purpose of the Minute of Agreement.

[39] It was his position that it was critical to identify the purpose of the Agreement in reaching a conclusion regarding the proper construction of it and in particular in reaching a proper construction as to whether non time recorded work in progress should be included when calculating the PBL Capital. That purpose he stressed was not to see that the PBL Partners got a fair value for their interest in the firm, and once that underlying basis of the defenders' position was rejected, their argument anent construction equally fell away.

[40] Turning to Clause 22(b) counsel argued that this did not as contended for by the defenders' counsel support the defenders' view as to the proper construction of the contract. Rather it supported the pursuers' position. If the parties had wished work in progress in the non-time recorded parts of the firm to be valued, then it would not have chosen a law accountant. The choice of such a person to do the valuation he submitted showed that the only non-time recorded work to be had regard to was legal work and not work in progress in the non-legal sectors. He submitted that in any legal firm there would be non-time recorded legal work and it followed that there would be such in Pagan Osborne.

[41] There were a number of secondary construction arguments put forward on behalf of the pursuers. These arguments did not have any bearing on the above central construction issue; rather they were aimed at certain discrete alternative positions taken up by the pursuers in their pleadings.

[42] First, he submitted that the defenders' averments in Answer 3 to the effect that the late production of the draft accounts constituted a breach of Clause 9 of the Agreement were irrelevant and lacking in specification since properly construed there was no date by which the accounts were to be produced. In terms of Clause 9 the obligation on the pursuers was to instruct accounts, not to have accounts completed therefore any failure to complete was not a breach on their part. In addition he submitted that in terms of Clause 7(c) payment was to be made at a specific date or within one month after the accounts were approved. This again tended to point towards there being no fixed date at which the accounts were to be produced. What flowed from the above was that there could not be an obligation on the pursuers to produce the accounts at a given date. He conceded that Clause 9 of the contract envisaged the accounts being produced expeditiously, but that was different from an obligation to produce by a specific date. He submitted that there was thus no definitive obligation on the pursuers which could be said to have been breached. He went on to submit that in any event even if relevant the averment of breach was nothing to the point since the defenders did not aver that any loss had been caused by that alleged breach. He submitted that if there was a breach there was no obvious consequence. It was not, he submitted, said to amount to a basis for repudiation, there was no plea in law to that effect. Whatever was said about breach it did not matter as there was no plea in law which flowed therefrom.

[43] Secondly, he submitted that the defenders' averments in Answer 3 anent an alleged failure to provide adequate cash room and IT services under the Agreement were irrelevant and lacking in specification. The averments of alleged breach lacked specification to the point of irrelevancy. There was no obvious causal connection with the alleged need to employ some third party and the averments of loss (i.e. the cost of г1500 said to have been paid to the third party) similarly lacked specification to the point of irrelevancy.

[44] Thirdly, he submitted that the defenders' averments anent set off were irrelevant in that on a proper construction of Clause 7(h) of the Agreement set off based upon breach of contract was excluded.

[45] Fourthly, he submitted that the defenders' averments in Answer 4 that:

"Due adjustment also requires to be made arising from the payment of г49,000 which the defenders paid to the said Carolyn Ann Wilson. Said figure was due to be paid by the continuing partners to her, and due adjustment to be made, as provided for under Clause 9(i) of the Agreement. The continuing partners failed to pay said sum, which the defenders therefore paid"

were irrelevant.

[46] He submitted that they wrongly proceeded upon the basis that there was some obligation on the pursuers to make payment of a particular sum. Rather the Agreement required simply that the sum in question would be paid as "the first tranche of the division of profits", which it was. The defenders' averments did not disclose any basis upon which it could be said that they were under any obligation to make payment of the sum in question. As such, any payment made by the defenders being one which they made otherwise then in furtherance of any legal obligation was not one in respect of which "due adjustment" required to be made in terms of the Agreement.

 

The defenders' reply to the pursuers' secondary arguments

[47] As regards the argument put forward by counsel for the pursuers based on Clause 7(h) ruling out any right of set off or retention counsel's reply was that she did not seek set off or retention. Her pleadings anent the alleged breaches of contract etc were in order to entitle her to put forth an argument based on mutuality of obligations. She was using what was often described as the shield rather than the sword. She was pleading neither set off nor retention and accordingly required no plea in law to support her averments. In that her averments were not asserting a right of retention or set off, they were accordingly relevant.

[48] As regards the second line of argument relative to the alleged failure to provide adequate averments anent the cash room and IT services which were not supplied, counsel submitted that the averments on this aspect of the case between 16B and 16E of the Record gave fair notice of the position being taken by the defenders.

[49] As regards counsel for the pursuers' third point regarding the payment of г49,000 to Carolyn Wilson counsel's position was that she accepted having regard to Clause 9 there was no obligation on the defenders to make this payment. They had however done so. She thus submitted that if the pursuers' principal construction was correct, then account had to be taken of the said payment of г49,000.

[50] Lastly, in relation to the argument that there was no obligation on the pursuers to produce the accounts timeously, senior counsel's reply was short and pointed, namely: that if the pursuers' construction was correct it rendered the Agreement unworkable and therefore could not be correct.

 

Interpretation of Contract

[51] There was no dispute that the principles on which a contract should be interpreted were those summarised by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society 1998 1 WLR 896 at 912-913. Thus it was agreed that the question for the court was this: to ascertain what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.

 

Discussion
[52] The issue in the case came to be this, what was the proper construction of the phrase "the work in progress of the Firm at the Retirement Date" as that phrase is used in the definition of "the PBL Capital" at page 2 of the Agreement and which defined term forms part of the calculation of consideration in terms of Clause 7(c) of the Agreement.

[53] In my opinion the words "the work in progress of the Firm at the Retirement Date" are not capable of bearing the meaning put forward on behalf of the pursuers. On the other hand, they are capable of bearing the meaning contended for on behalf of the defenders. I have reached the view that the defenders are correct in their assertion that the phrase includes the non-time recorded work in progress of the non-legal sectors. I have reached this view for the following reasons:

[54] First, on examination of the definition of the PBL Capital the phrase "work in progress of the Firm at the Retirement Date" is not qualified in any way and in particular no words of restriction or limitation are used in relation thereto. There are no words in the definition of the PBL Capital suggesting that only part of the work in progress was to be taken into account and that, in particular, non-time recorded work in progress in the non-legal sectors was not to be included.

[55] Secondly, it is the clear intention of the provision defining the PBL Capital that "work in progress of the Firm at the Retirement Date" is to mean something different from "work in progress of the Firm shown in the Accounts". A construction of the definition of the PBL Capital which did not recognise that they were to be different would be unworkable as the definition would be rendered meaningless.

[56] Counsel for the pursuer contended that that difference was the value of partners' time and work which was expressly referred to in the provision as being included in the work in progress of the Firm at the Retirement Date, and it was accepted was not taken into account in the Firm Accounts. I accept that on the basis of this assertion the definition is rendered workable. However, that construction does not fit with the language used in the Clause. If it had been intended that the difference between the two valuations of work in progress should be made up solely by the partners' time and work then in my opinion the reference to partners' time and work would not commence with the word "including". The use of such a non-exhaustive word strongly militates against the argument put forward by counsel for the pursuers. In my view, if the intention of the parties to the Agreement had been that the only addition to the work in progress of the Firm as shown in the Accounts to arrive at work in progress of the Firm at the Date of Retirement was to be that relating to partners' time and work, then the word used at the beginning of said section of the definition would have been, for example, "namely" which would clearly have indicated that the sole difference was partners' time and work.

[57] Thirdly, if there were any doubt as to the non-time recorded work being included in the definition, this is swept away by the phrase: "valued on the basis of the full selling price of the time recorded or work done in relation to any matter". If the parties' intention had been to exclude non-time recorded work there would have been no need for the words "or work done in relation to any matter" to be used. On the pursuers' construction theses words have no meaning. Again I note the breadth of the language used which points strongly in favour of the defenders' construction.

[58] Fourthly, I also note that in the definition of the PBL Capital, the reference is to "the work in progress of the Firm at the retirement date" (emphasis added). I note that "Firm" has a capital F. That accordingly clearly refers back to the definition of the Firm at page 1 of the Agreement. The Firm as defined refers to the totality of the firm not just merely a part of the firm. The words "the Firm" wherever they are used throughout the Agreement refer to the whole interests and assets of the firm and not to some part thereof. Contractual provisions should be construed in the context of the contract in which it is found (see Gloag on Contract 2nd Edition, page 399). Thus where the Firm bears that meaning throughout the Minute of Agreement I can identify no reason why in this provision it should not be given the same meaning.

[59] Fifthly, in my view if the pursuers' contentions were correct, the parties could have expressed this much more easily by explicitly excluding the non-time recorded work from the definition of the work in progress of the Firm at the Retirement Date. Their failure to do that is of some assistance in arriving at a proper construction of this phrase and clearly favours the defenders' construction.

[60] Sixthly, turning now to Clause 6(c) a powerful reason for favouring the defenders' construction is that in addition it fits well with the language in said Clause, which is expressly said to deal with the issue of valuation of the work in progress, whereas the pursuers' construction does not fit at all well with the language in the said Clause.

[61] The use of the word "whole" at the start of the phrase the "whole work in progress of the Firm as at the Retirement Date" is clearly designed to capture the entirety of the work in progress and not just part of it. Even without the use of the word "whole" it would be difficult to hold that this phrase meant only part of the work in progress for the reasons which I have already given when considering the definition of the PBL Capital. However, the addition of the word "whole" in my view makes the intention of the parties absolutely certain, namely: that the entirety of the work in progress should be taken into account.

[62] Further, the points which I made regarding the use of the words (a) "the Firm", (b) "including" and (c) "full selling price of the time recorded or work done in relation to any matter" when discussing the definition of the PBL Capital are equally applicable to the analysis of this provision. These all point clearly to the construction put forward on behalf of the defenders.

[63] Seventh, the wording of the definition of PBL Capital and the wording of Clause 6(c) fit together. The breadth and all encompassing language in the two provisions and the lack of any limiting words in my opinion fit well with the defenders' construction. To place the pursuers' construction on these provisions would, in my judgment, place a wholly strained construction on the wording of these provisions which they cannot bear.

[64] Eighth, in arriving at a proper view as to the purpose of the contract I accept counsel for the pursuers' submissions (which were not in dispute) that the purpose was not the dissolution of the firm (see: Clause 2ii) and secondly, in terms of Clause 24 the Partnership Agreement was expressly superseded. A number of things flow from these express terms of the Agreement: first, authorities based on the dissolution of a firm were of no particular assistance in construing what the rights and obligations of the pursuers were in terms of the Agreement. Secondly, no assistance as to the purpose of the Agreement could be gained from the Partnership Agreement and by implication from the Partnership Act 1890. Thirdly, any appeal to general concepts of fairness and equity could form no part of my considerations when construing the Minute of Agreement.

[65] Counsel for the pursuers' position was, however, in addition that if I accepted the foregoing then the underlying basis for the defenders' construction of the Agreement fell away and accordingly the defenders contended for construction was shown not to be correct. I have no difficulty in rejecting that argument. The defenders' counsel at no point relied on the Partnership Agreement, the Partnership Act 1890, the law regarding the dissolution of partnerships or any general concept of fairness or equity in support of her argument. She readily accepted that the purpose of the Agreement was not a dissolution as that would run counter to the express language used. Rather her argument as to the purpose of the Agreement was based entirely on the terms of the Agreement and nothing else. Her whole argument as to the proper construction of the Agreement was founded strictly on the language of the Agreement. First, as I have said, she analysed the wording of the provisions and as above set forth I preferred her submissions in terms of this branch of her argument to those made on behalf of the pursuers. In the course of her submissions, senior counsel also advanced a second broad branch to her argument and in terms of this she made reference to the purpose of the Agreement, however, this was not by reference to the Partnership Agreement, the Partnership Act or equity but again by reference to the language of the Agreement.

[66] Ninth, as regards the purpose of the Agreement, this in my opinion when examined clearly supports the defenders' view on construction of the phrase "work in progress of the Firm at the Retirement Date".

[67] In my view paragraph (iii) of the preamble of the Agreement sets out its purpose:

"The parties hereto have agreed upon the terms and conditions upon which the PBL Partners will retire from the partnership."

[68] That retiral must be seen in the context as set out in the preamble at paragraph ii that the partners retiring, namely: the PBL Partners intended to commence trading together as CCW.

[69] In order to achieve that purpose the Agreement then proceeds to carry out what senior counsel for the defenders (correctly in my opinion) described as the disaggregation of the two sets of partners' entire interests in the Firm, i.e. the whole assets of the firm are separated into their component parts. This is achieved by transfer of the PBL assets as defined at page 2 of the Agreement to the PBL Partners; the retention of the rest of the Firm by the PO Partners and thereafter a final balancing figure due to or by the PBL Partners, having regard to their whole interest in the Firm is calculated by reference to the PBL work in progress defined at page 3 of the Agreement and the PBL Capital (see: Clause 7 of the Agreement).

[70] The whole structure and landscape of the Agreement fits in with the purpose of dealing with the retiral of the PBL Partners and the disaggregation of the whole assets and liabilities of the Firm. Pages 2 and 3 of the Agreement begin by defining a whole series of matters as relating to the PBL Partners and thereafter define a series of PO matters as being "other" than the already defined PBL matters. This in my opinion clearly shows that the purpose is the disaggregation of the whole assets and liabilities of the Firm.

[71] The language used in the definition of the PBL Capital and in Clause 6(c) fits in with this purpose. In my opinion the object which I have identified further reinforces the correctness of the defenders' construction of the critical phrase "work in progress of the Firm at the Retirement Date".

[72] The pursuers' submission as to the purpose of the Agreement was too narrow. It had no regard to the preamble of the Agreement and the expressly stated purpose that the Agreement was to deal with the retiral of the PBL Partners. If, as argued by the pursuers, the sole purpose of the Agreement was to deal with the purchase of certain assets by the PBL Partners and to fix a price for these, this could have been said more simply than as set out in the Agreement.

[73] Nor did the pursuers' submission have regard to the landscape and structure of the Agreement which for the reasons I have given fitted in with a disaggregation of the whole assets of the Firm. It is, in my judgment, really impossible to read the structure of the Agreement as giving no more than a mechanism whereby the PBL Partners purchase certain assets. If that were the intention of the parties to the Agreement then the language and structure of the Agreement would in my judgment have been entirely different. In my clear view the purpose of the Agreement, namely disaggregation of the entire assets, on retiral is set out and the structure and mechanisms of the Agreement reflect that purpose.

[74] The pursuers' submissions as a whole thus did not fit in with the purpose of the Agreement. When I turned to the detailed language of the Agreement I believe that the pursuers' submissions equally did not fit in with the detailed language of the provisions.

[75] The defenders' construction of the critical phrase "the work in progress of the Firm at the Retirement Date" and the use of that phrase within Clause 6(c) fit in with the purpose of the Agreement I have identified in that this allows a valuation of the whole of the PBL Partners' interest in the firm and not merely some part of it.

[76] The defenders' construction of Clause 6(c) and of PBL Capital is consistent with the other provisions in the Agreement.

[77] Some limited support for the defenders' construction can also be had from the terms of Clause 22(b). If Clause 6(c) is to include a large element of non-time recorded work in progress, i.e. the four non-legal elements of the firm's business, then a dispute resolution mechanism in relation to the value of that would be necessary and accordingly Clause 22(b) tends to support such a construction of Clause 6(c).

[78] Lastly, turning to the pursuers' arguments relative to construction, in summary I have come to the view that the construction for which the pursuer contends puts a wholly strained construction on Clause 6(c). It requires in my view the ignoring of certain words in the Clause such as "whole" and "time recorded or work done in relation to any matter". It requires that the word "including" in the context of the Clause has a restrictive effect although it is clearly a non-exhaustive word. It requires the phrase "the Firm" to have a meaning which runs counter to the definition of that phrase within the Agreement. The whole wording of said Clause taken in the context of the whole Agreement clearly favours the construction placed upon it by counsel for the defenders and in no way supports the construction placed upon it by counsel for the pursuers.

[79] Counsel for the pursuers advanced the argument in support of his construction of the said phrase that the valuation of non-time recorded work would be difficult if not impossible due to a lack of data upon which to base the valuation and this unworkability pointed towards his construction of Clause 6(c).

[80] As counsel for the defenders pointed out, valuation may be precise or more rough and ready depending on the amount of data available upon which the valuation is to be based. Thus any difficulty in valuation due to a lack of data, does not of itself point to not taking account of non-time recorded work in progress.

[81] Even taking the pursuers' position at its highest that non-time recorded work in progress could not be valued, it does not point to the pursuers' construction being the proper one. If the pursuers' position is that no value can be placed on the non-time recorded work in progress, then such a value should be placed on that work in progress. Thereafter if that is not accepted by the defenders then the named expert can be asked to rule on the matter as is contemplated in Clause 22(b). I was not persuaded by this argument put forward by counsel for the pursuers.

[82] For all of the foregoing reasons I prefer the submissions made on behalf of the defenders and conclude that the proper construction of the phrase "work in progress of the Firm at the Retirement Date" is that it includes non-time recorded work in progress of the four non-legal sectors.

 

Decision

[83] I accordingly sustain the defenders' first plea-in-law, repel the pursuers' pleas-in-law and dismiss the action. I have reserved the issue of expenses.

 

Postscript: The Pursuers' Secondary Submissions

[84] In that I have found against the pursuers in relation to the principal issue of construction of the Agreement, I do not require to turn to look at their secondary arguments on construction and relevancy, however, in that I was addressed at some length in relation to these matters I would intend to opine thereon.

[85] As regards whether the defenders' averments anent breach of contract etc. were irrelevant having regard to the terms of Clause 7(h), I hold that the defenders were entitled to advance these arguments on the basis of the general principle of the mutuality of contract whose application is not merely restricted to retention: see: Bank of East Asia Ltd v Scottish Enterprise 1997 SLT 1213 per Lord Jauncey at 1216 and Macari v Celtic Football Athletic Co Ltd 1999 SC 628 at 639E-F and 640A-B, per Lord President Rodger. Thus the defenders were entitled to resist the pursuers' claim to perform by making certain payments where they were alleging breaches of contract on the part of the pursuers. In my view the defenders' exercising of their rights in terms of the said principle did not fall foul of Clause 7(h) of the Agreement. This right is separate from the right of retention and of set off.

[86] Secondly in my view on consideration of the terms of the Agreement there is an obligation on the pursuer to produce the accounts timeously. Clause 7 envisages a payment on 31 January 2004 or within one month of the approval of the accounts, whichever is later. Clause 9 provides inter alia that as soon as practicable after the retirement date the accountants are to be instructed to prepare the accounts and the partners are to co-operate so the accounts can be prepared as expeditiously as possible. Reading these two Clauses together there is an obligation on the pursuers to produce the accounts timeously. The question as to what would be timeous, given that there is no express term, would have to be dealt with by implication and by reference to a reasonable period. Such a term could, with no difficulty, be implied. The Agreement has in my view to be read in that way in order to give it commercial sense. If it is not read in that way in my view the Agreement becomes unworkable. Looking at the intention of the Agreement the pursuers' contention in relation to this matter cannot be correct.

[87] As regards the pursuers' submissions re the specification as to the failure to provide adequate cash room and IT services in my opinion there was no merit in this submission. Sufficient detail was in my view given as to the alleged failures so that the pursuers could not be in any doubt as to what was being said against them in relation to this aspect of the case. In my view the connection between the failures and the need to employ a former Law Society inspector is made clear at page 16E where it is inter alia averred that failures to provide adequate cash room and IT services resulted in a cash room and accounting system which did not comply with the Law Society's requirements. I am unable to identify any prejudice to the pursuers in their preparation of their case due to lack of averments on this issue.

[88] As regards the г49,000 payment made by the defenders to Carolyn Wilson, I accept that there was no express obligation on the defenders to pay this sum. However, given that in terms of Clause 9 , this sum was to be allocated as the first tranche of the profits, account has to be taken of said sum in working out what is due by the defenders. Thus in my view these averments are relevant.