SHERIFFDOM OF NORTH STRATHCLYDE AT DUMBARTON
JUDGMENT
of
Sheriff MUNGO BOVEY QC
in the cause
MARK CHRISTOPHER SHEPHERD
pursuer
Against
RAYMOND GEORGE MALLON
defender
COURT REF NO A131/12
Act: party litigant
Alt: Thompson, Thompson & Brown, Solicitors, Glasgow
Dumbarton 1 November 2013
The Sheriff, having resumed consideration of the cause:-
Appoints the parties to be heard at a procedural hearing to be afterwards fixed to decide the outstanding issues identified in the note annexed hereto.
Sheriff
FINDINGS IN FACT
| 1 | In 2009 the parties were both solicitors practising in Falkirk. By contract of partnership dated 15 October 2009 (6/1 of process) they agreed to carry on business together in partnership as solicitors from 9 November 2009. This they did under the name of RMS Law LLP ("RMS"). |
| 2 | In about April 2011 both parties were working very hard, seven days a week, at RMS. The pursuer told the defender that he had a bigger case load than the defender and that he was bring in more money than the defender. |
| 3 | In about April 2011, the pursuer advised the defender that the amount of work he was doing was adversely affecting his health and quality of life. He wanted to change his life style. He put to the defender a plan whereby he would resign as a partner on October 31 and not renew his practising certificate but continue to work for the firm as a business consultant. The defender didn't feel that the firm needed a business consultant but the parties agreed that the pursuer would cease to be a solicitor and resign from the partnership on 31 October and continue as a paralegal, also carrying out the administration of the firm. |
| 4 | The parties began to work towards the implementation of this agreement and held discussions on the financial terms on which the pursuer would retire from the partnership. |
| 5 | In about July 2011 the parties discussed their respective caseloads. Both indicated that they had eight drawers full of files. The defender said he had about 100 live files in eight drawers which he valued at about £100,000 in total in terms of the income they might produce. The pursuer had two four drawer filing cabinets in his office. The pursuer said he had files filling his two filing cabinets but valued them at "a bit more" than the defender's. He assented to a suggestion that they might be worth £120,000. |
| 6 # | By "contract of variation of partnership" dated 1 November 2011 (no 5/1 of process) ("the contract") the parties agreed that the pursuer would resign from the partnership with effect from the close of business on 31 October 2013. In terms of paragraph 2 of the contract, the pursuer "...will be entitled to" payments which may be summarised as follows:-(a) One half of the balance of the Firm Bank Account; (b) One half of the monies paid out of the Firm Bank Account for expenditure for the year commencing 1 November 2011; (c) One half of all outstanding fees of the firm of RMS Law LLP as at the close of business on 31 October 2011; (d) One half of the net value of the unfee'd and unpaid work carried out by the firm before close of business on 31 October; (e) A sum of £20,000. |
| 7 | £15,182.01 was paid by the defender to the pursuer in respect of item (a) and this item is not in dispute between the parties. Item (b) is not in dispute because no expenditure of the kind covered by it had been incurred. |
| 8 | Item (e) relates to goodwill, particularly the pursuer's caseload. In or about August or September 2011 the defender asked the pursuer what he was looking for for his balance and said that if he was looking for a figure of £40 to £50 thousand, then that would not be something he could manage but if the pursuer was looking for a figure of about £20,000, that was a figure he could manage. After this, the pursuer prepared the contract. |
| 9 | At no stage prior to 1 November 2011 did the pursuer indicate to the defender that his case load was reducing. Had he known that the pursuer's live case load was in fact only 15 cases, the defender would not have contracted to make the payment provided in paragraph 2(e) of the contract. |
| 10 | After 31 October, the pursuer continued to work at the former partnership business as an unqualified assistant. On 16 December 2011 the defender summarily ended this employment. |
| 11 | When he left, the pursuer left behind him all the furniture and items he had supplied during the life of the partnership including a number of desks and filing cabinets. |
| 12 | Jane Steer joined RMS on 1 November 2011 as partner in succession to the pursuer. When he recruited her as a partner in the Summer of 2011, the defender told Ms Steer that she would be taking over a full case-load from the pursuer. He made this representation in good faith in light of the understanding of his caseload that the pursuer had communicated to him. Ms Steer obtained a bank loan to allow her to invest in the partnership on this basis. In the period before 1 November 2011 Ms Steer visited the RMS premises and discussed matters with the parties. The pursuer indicated to her that the business was doing well and that he had full commitments. He did not disabuse her of her expectation that she would be inheriting a full case load. |
| 13 | Seven of the fifteen cases Ms Steer inherited from the pursuer on 1 November 2011 had proofs fixed in them for the following three months. These proofs were entered in the firm's diary before the end of October 2011 and the entries were seen by Ms Steer and the defender. The number of proofs confirmed Ms Steer's understanding that she was inheriting a full case load. In fact, many of the proofs were inappropriate in the circumstances of the cases in question. |
| 14 | Ms Steer took over the room previously occupied by the pursuer including his desk and filing cabinets. There were two filing cabinets, each with four drawers. They were full of papers but many of them proved to be either files that were no longer current or materials that never had been files such as styles or case reports. Ms Steer removed the items that were not current files and put them in the corridor outside her room. Once she had done this, she was left with 15 current files. These occupied about one and a half drawers of one of the cabinets. Of the RMS files that were removed as finished, most had been paid in the previous six months. |
| 15 | In November 2011, when Ms Steer and the pursuer were still sharing his former room, he put some of the RMS files Ms Steer had removed as being no-longer current back in the filing cabinets. |
| 16 | In mid November 2011 Ms Steer told the defender that the pursuer had replaced dead files in the filing cabinet and that there were not many live files. |
| 17 | The defender signed the contract on a representation by the pursuer that there was cash flow in the business to maintain the business and make the payments provided for. However, in the period after Ms Steer joined RMS, the firm suffered a drop in income because the bulk of the pursuer's files had been fee'd and the live files he left did not produce a sufficient flow of cash. In January 2012 the defender had to borrow a further £10,000 to keep the business going. |
FINDINGS IN FACT AND LAW
By failing to correct the understanding of the defender as to the extent of his case load, the pursuer misrepresented a material matter and induced the defender to agree to pay him £20,000 in breach of his duty of good faith in partnership matters.
NOTE
(1) I heard evidence on 22 April, 29 July and 28 August 2013 and submissions on 28 August. The defender had the shorthand notes of the first two days extended and provided me with a copy of the notes.
A The witnesses
(2) I found the pursuer evasive and overly-analytical of the questions he was asked. I am concerned in particular at the pursuer's studied failure to state the number of live files he left his successor. In cross examination, the pursuer objected to the number of live files he left behind being put to him as 20 on the erroneous basis that there was no record for this number. I found this damaging to his credibility. The issue is on any view important and I found his evidence lacking in frankness. Eventually he agreed that the figure proposed by the defender - twenty live files - might be correct.
(3) I do not accept the pursuer's account of the parties negotiating the payment of £20,000 without reference to the caseload he was leaving behind. . He was at pains to include in it many items such as the "basic furniture" and the website. The idea that it included goodwill was only implicit in his evidence and that word never passed his lips. The impression I have is that the pursuer furnished the partnership premises very economically and that what he left behind was modest in value and of little interest to the defender. The idea that he would pay £20,000 for second hand furniture and law books was not accepted by him in the witness box and I do not believe it ever was. The pursuer was the driving force behind the establishment of the firm and every aspect of it bore his mark but, again, I do not accept that the defender agreed any significant payment in recognition of his efforts
(4) In support of his own credibility, the pursuer prayed in aid the fact that he wanted to continue with the defender in the unqualified role he had identified for himself. This would be inconsistent with his having done anything fraudulent to the defender
(5) I do not find this persuasive: The defender seems to have abdicated the running of the business to pursuer. My impression is that the pursuer was used to getting his way and, indeed, the defender seems to have entered into the variation agreement on an assurance from the pursuer that he could afford it. I conclude that the pursuer felt able to extract his pound of flesh from the partnership without fear of consequences.
(6) I found the defender credible and generally reliable. In contradiction of the credibility of the defender, the pursuer relied on payments made in terms of the variation contract in February and March 2012 when he must have known of the state of the files the pursuer had left behind. Even in August 2012, when defences were lodged, they made no reference to misrepresentation. This first featured in the counterclaim lodged in September 2012.
(7) All this is true but it must be borne in mind that the defender is much less driven in matters of business than the pursuer. Of greater weight to me is the fact that fairly shortly after Ms Steer told him the true state of the caseload the pursuer had left behind, the defender summarily brought the relationship between the parties to an end. No other plausible explanation for this termination has been offered. From the point of view of establishing what the defender expected from the termination of the partnership, I find his conduct in this regard compelling. In so holding, I appreciate that I am accepting Ms Steer's account of events in preference to that of the defender.
(8) The pursuer's wife gave evidence that the pursuer had not slowed down his work in the period up to 31 October 2011. In his previous practice he had had cabinets full of files, much more than twenty. I didn't find her evidence of much assistance.
(9) Jane Steer gave evidence on the defender's behalf as to her time after she joined RMS. She gave evidence before the defender who was unable to attend that day because of professional commitments. I found her an impressive witness and have incorporated much of her evidence in the findings in fact.
(10) Ms Steer did not tell me in terms that it was the pursuer who returned to her filing cabinet files that she had removed as finished but I was in no doubt that she thought it was him. I accept the defender's evidence that she told him that it was the pursuer. The pursuer did not suggest that this had not happened. Rather, he sought to suggest to her that some of the files she regarded as finished might have some continuing value. There was no suggestion that anyone else might have returned the files or have any interest in doing so. I have no doubt that it was the pursuer.
B The Issues
(11) In this action the pursuer seeks to enforce paragraphs 2 (c) to (e) of the "contract of variation of partnership" dated 1 November 2011 (no 5/1 of process) whereby the parties agreed (in paragraph 2) that the pursuer "...will be entitled to" payments which I have summarised as follows:-"
(a) One half of the balance of the Firm Bank Account;
(b) One half of the monies paid out of the Firm Bank Account for expenditure for the year commencing 1 November 2011;
(c) One half of all outstanding fees of the firm of RMS Law LLP as at the close of business on 31 October 2011;
(d) One half of the net value of the unfee'd and unpaid work carried out by the firm before close of business on 31 October;
(e) A sum of £20,000.
(12) Items (a) and (b) are not in dispute.
(13) The first three craves are intended to achieve an accounting by the defender in relation to items (c) and (d) in relation to the period from 1 November 2011 to the end of July 2012. The defender has paid £6,056.25 under this head. In cross-examination, he accepted a liability to pay what was due.
(14) Item (e) is payable in instalments of £5,000. One has been paid. The fourth crave seeks payment of the second and third. The fourth is now due in terms of the contract though not the subject of this litigation as such.
(15) In his evidence in chief, the pursuer divided up the payments into three elements: (a) and (b) being the first (the bank account), (c) and (d) being the second (work done to date) and (e) being the third ("everything else"). The first two, he said were "obvious" and the third "...like the remaining value that I had in the firm."
(16) There was some dispute as to the interaction between the parties' "contract of partnership" and their "contract of variation of partnership". The pursuer maintained that the latter was an entirely free-standing contract, varying "the relationship" rather than the earlier contract. I cannot imagine how this could be so. I was not, however, asked to make any decision in relation to the original partnership contract.
B1 Misrepresentation
(17) The factual nub of the defender's case of misrepresentation is contained in statement 2 of the counterclaim printed in the record dated 11 January 2013 which is the current record: "...the pursuer advised the defender that the pursuer had two filing cabinets full of files that had significant value and constituted a full ongoing case load... After the [pursuer left] the defender established that the pursuer had approximately 20 live files which... did not constitute a full ongoing case load."
(18) I am satisfied that the essentials of this case are made out.
(a) The representation of a full case load
(19) In addition to his own evidence of the direct representation made in July 2011, there are a number of factors that support the defender's case:
1. The whole context of and reasons the pursuer gave for his desire to retire from the partnership and as a solicitor;
2. When he recruited her as a partner in the Summer of 2011, the defender told Ms Steer that she would be taking over a full case-load from the pursuer. He made this representation in good faith in light of the understanding of his caseload that the pursuer had communicated to him. I am satisfied that the defender would not have told Ms Steer as he did had he not had that information from the pursuer.
(b) The failure to correct
(20) The representations by the pursuer in July 2011 as to the level of work he then had are not proved to be false: Although I accept Ms Steer's evidence that the two cabinets contained a significant amount of material that never was RMS files, which is contrary to what I accept the pursuer told the defender, this, however, is only one measure of a caseload and I would not be prepared to base a finding of this seriousness on it.
(21) But, by the time the parties signed the contract on 1 November 2011, the pursuer's representations of July were not correct: He did not have a full case load. He had only 15 live files.
(22) The pursuer failed to correct his representations to the contrary. Rather, he took steps to bolster the impression that he had a substantial continuing workload: in this regard, I accept that the pursuer only signed the contract on the assurance of the defender that he could afford to pay the sums to which he was committing himself. This is consistent only with the pursuer inducing in him a continuing belief that he was leaving Ms Steer a full case load.
(23) The evidence of the pursuer and his wife that he didn't slow up in his work before 31 October 2011 points in the same direction as does the number of proofs in the court diary. The pursuer's indication to Ms Steer that the business was doing well and that he had full commitments would convey the same impression as would his returning to her filing cabinet files that she had removed as finished.
(c) The materiality and effect of the misrepresentation
(24) I accept the evidence of the defender that had he known of the true caseload being left, he would not have agreed to pay the pursuer £20,000 in terms of paragraph 2(e) of the contract of variation of partnership.
(25) In this regard, I attach some significance to the fact that the defender's dismissal of the pursuer from his continuing involvement in RMS followed not long after the true nature of the caseload he had left being made clear to the defender.
(26) Partners are in the position of fiduciaries to each other which extends to the circumstances of leaving the partnership. In Finlayson v Turnbull (no 1) 1997 SLT 613 the defenders had made off with a large number of files when leaving the partnership. At page 614L Lord Milligan summarised the approach incumbent on them:
"[sections] 28 and 29 of the Partnership Act 1890 demonstrate that equitable rules apply to the parties in association so as to ensure that 'they shall zealously act and co-operate for the common good and that they shall not place their individual interests before those of the company...A partner must act ...honourably...[Partners] must act in accordance with a high standard of fairness in dealings with each other, and the partnership remains in existence to wind up existing matters and does not cease on dissolution."
(27) I have no doubt that in failing to correct the representations he had made of having a full case load, the pursuer fell well short of these standards.
B2 Setting aside the contract
(28) The counterclaim seeks to "find and declare that the contract of variation... should be set aside." The defender's third plea in law is:
"The defender having been induced to enter into the agreement by false representations on material matters is entitled to have the contract set aside by way of exception."
(29) In his evidence, Mr Mallon did not challenge paragraphs 2(a) or (b). His complaint in relation to (c) and (d) were that it was agreed on the basis that the parties were bringing in roughly equal amounts of money but I have no evidence that they were not. Rather, my impression is, as Ms Steer put it, that Mr Shepherd had fee'd everything that could be fee'd before he left. The effect of this is that he was entitled both to one half of his work to date and the £20,000 which the defender expected to cover a good deal of it as work in progress. I am not clear that paragraphs (c) and (d) were vitiated by the pursuer's misrepresentations as to his case load since these representations only affect the situation as at 1 November.
(30) A good part of the contract has been implemented - the pursuer has resigned from the partnership and the defender has retained the assets of the partnership. Even paragraph 2 has been substantially implemented, with payments made in terms of a number of its provisions.
(31) Viewed very generally, it seems to me that the equitable way in which to proceed is to grant the accounting in relation to the unchallenged parts of paragraph 2 of the contract but to refuse to enforce the payment of £20,000 which I consider was vitiated by misrepresentation on the part of the pursuer. But I am conscious that I am at present asked to set aside the whole contract.
(32) Ordinary Cause Rule 21.3(1) provides that "Where a deed or writing is founded on by a party, any objection to it by other party may be stated and maintained by exception without its being reduced."
(33) The material parts of this rule are in the same terms as Court of Session Rule 53.8 which is in the following terms:
"Where, in an action, a deed or other writing is founded on by a party, any objection to it may be stated by way of exception, unless the Court considers that the objection would be more conveniently disposed of in a separate action of reduction."
(34) In considering this rule in Vaughan Engineering v. Hinkins & Frewin [2003] ScotCS 56 (3 March 2003) Lord Clarke was addressed on the nature of the ope exceptionis jurisdiction. At paragraph 25 he records:
"Both parties were at one in submitting that the effect of seeking to resist the effect of deed or writing ope exceptionis was not to reduce the deed. To that extent it is, strictly speaking, not correct to speak of reduction ope exceptionis. Neither Rule of Court 53.8 nor the relevant Sheriff Court Rule uses that expression. The expression ope exceptionis, under reference to its role in Roman law, is described in Trayner's Latin Maxims as follows (at page 425):
"- By force of exception. An exception is a kind of defence, but the distinction between defences and exceptions is practically disregarded in the practice of our law. In the civil law (where it originated) an exception was a reason set forth by the defender why he should not be condemned to pay or perform that which the pursuer claimed, founded upon some equitable ground, and of which the strict law could take no cognisance.... A single instance may illustrate the distinction between defence and exception, as held in Scotland, although, as we have said the distinction is practically disregarded. If A suing B for the price of certain goods ordered by and delivered to him, be met with the statement that the goods were never either ordered or delivered, this was a defence; but if B, admitting the receipt of the goods pleads that he has already paid the price thereof to A, this is an exception."
(35) Lord Clarke held at paragraph 33 in Vaughan that the defence is not a reduction. The position in the Sheriff Court seems to me to be even more clearly to that effect given that the Sheriff Court Rule does not contain the ambiguous reference to reduction that the Court of Session rule has and the Sheriff has no jurisdiction to grant reduction.
(36) The form of the defender's plea in law follows those in Dobie's Sheriff Court Styles (at page 363). In the circumstances, it seems to me that the words "set aside" simply refer to the fact that a document upon which one party would succeed but for the challenge does not avail him where the challenge is made out.
(37) This, however, does not call for a formal setting aside of the document by the Sheriff, an act which has strong overtones of the reduction jurisdiction which the Sheriff does not possess. It follows that I consider that the crave in the counterclaim to "find and declare that the contract of variation... should be set aside." is misconceived. In this regard, I note that paragraph 12.72 of the third (2006) edition of MacPhail Sheriff Court Practice states that "The party stating the objection must give fair notice of the objection and the ground on which it is based by stating an appropriate plea-in-law and supporting it with relevant averments."
(38) This seems to support the idea that the points should be made in the defences. Here, the correct course seems to me to uphold a plea of the nature of the third plea for the defender but to refuse as unnecessary the crave in the counterclaim.
(39) The analysis has a further consequence which may have a more practical effect: I am persuaded that the pursuer induced the defender to agree to pay him £20,000 in breach of his duty of good faith in partnership matters. Any challenge to the rest of the contract fails. Part of the £20,000 has been paid and repayment is not sought. These circumstances might, it seems to me, lead to substantial difficulties if the defender were to seek reduction of the contract. Partial reduction is competent but not easy.
(40) However, what we have here is the defender's defence against the pursuer's attempt (in crave 4) to enforce payment of two of the four instalments in which the £20,000 was to be paid. Properly understood as a defence, it might be argued to succeed where reduction would fail. This, however, brings me back to a concern that both analyses might amount to discounting just a part of a multi-faceted arrangement. There might be severability issues:
"...if there are distinct, partial and severable rights or interests, partial reduction will be the appropriate remedy." (Stair Memorial Encyclopaedia of the Laws of Scotland, Vol. 13, para. 63).
(41) I do not feel able to do this without giving the parties an opportunity to make further representations on this issue. The issues I have in mind here are:
a. Whether upholding the defence of misrepresentation by rejecting the pursuer's attempt to enforce payment of part of the sum due under paragraph 2(e) of the contract raises the same issues as a partial reduction would; and
b. If it does, whether the provision sought to be enforced is severable from the rest of the parties' contract
B3 The accounting
(42) This issue received barely any attention at the proof.
(43) Sub-paragraphs (c) and (d) entitle the pursuer to a half share of work that had been done by the time he left but which was then either unpaid (c) or unfee'd and unpaid (d). Payments were due on the quarterly basis set out in paragraph (ii) on page 2 of the contract. Article 5 of condescendence.
(44) I do not think that by misleading the defender as to the extent of his caseload when he left, the pursuer forfeited his right to a share of the work that had been done up to then.
(45) The parties did not join issue on these craves or expressly reserve the issue but I consider such reservation implicit in the manner in which the proof was conducted. I shall accordingly put this case out for a procedural hearing on the craves for count, reckoning and payment. In that regard, the following issues can be identified:
1 Future procedure
(46) Paragraph 21.04 of the third edition of MacPhail says that the progress of the action ought usually to fall into two separate and clearly defined sections: (1) a decision on the liability of the defender to account to the pursuer; and (2) when that matter has been admitted or decided, a decision on any points in dispute on the figures in the accounts produced."
2 The duty to account
(47) If the defence of misrepresentation fails, as it has in relation to sub-paragraphs (c) and (d), is there is a duty on the defender to account in relation to the matters covered by these sub-paragraphs?
3 paragraphs (iii) of craves 1 to 3
(48) To which part of the contract do these relate? Which averments support them?
4 the seeking of vouchers
(49) As I put to the pursuer (at pages 16 & 17 of his evidence), I was concerned that his craves for an accounting in fact sought vouchers which would allow him to do the accounting rather than an accounting by the defender. He is recorded as replying that "I think they are necessary to vouch the account because figures could be produced which may not vouch."
(50) In Smith v Barclay 1962 SC 1 (at page 9) Lord Justice-Clerk Thomson said:
"In an action of count, reckoning and payment what matters is the account of the intromissions put in by the defender, and not the books or invoices or accounts or whatever they may be, which are simply the raw materials on the basis of which the account of the intromissions is made up."
(51) What approach should the Court take to the craves as far as they seek vouchers?
5 crave 1
(52) In relation to the quarter to 1 February 2012, the pursuer avers (article 5) that the defender paid £6,056.25 under this head and goes on: "The defender supplied a calculation of this figure ..." Assuming the defender has a duty to account, has he fulfilled it by supplying this "calculation"?
(53) Are the averments of the parties at article and answer 5 objection and answer for the purposes of the second stage of the action?
6 craves 2 and 3
(54) Has there been any accounting here?
Further procedure
(55) In the foregoing circumstances, I will set out the case for a procedural hearing on a date to be afterwards fixed at which the issues I have identified can be addressed. I reserve the issue of expenses to the same occasion.
Mungo Bovey QC
Sheriff
November 2013