RECLAIMING MOTION BY (FIRST) STEVEN WORBEY AND (SECOND) KEVIN FARRELL AGAINST (FIRST) SHARON LAUGHLAND CAMPBELL; (SECOND) WAPO Y WAPA LIMITED; AND (THIRD) MATTHEW CHADWICK, AS TRUSTEE IN BANKRUPTCY OF STEVEN ELLIOTT
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2017] CSIH 49
CA200/15
Lord Brodie
Lady Clark of Calton
Lord Glennie
OPINION OF THE COURT
delivered by LORD GLENNIE
in the reclaiming motion
by
(FIRST) STEVEN WORBEY and (SECOND) KEVIN FARRELL
Pursuers and reclaimers
against
(FIRST) SHARON LAUGHLAND CAMPBELL; (SECOND) WAPO Y WAPA LIMITED; and (THIRD) MATTHEW CHADWICK, as Trustee in Bankruptcy of STEVEN ELLIOTT
Defenders and respondents
Reclaimers: A Smith QC, Markie; Clyde & Co
First and Second Respondents: Dunlop QC, Tariq; Cloch, solicitors
Third Respondent: unrepresented
26 July 2017
Introduction
[1] The pursuers, Messrs Worbey and Farrell, claim that no later than 17 October 2009 they entered into a partnership between themselves and Steven Elliott with the objects of development, promotion, preparation, marketing and exploitation of gay dating apps (subsequently known as “Bender” and “Brenda”) all for purposes of profit. They say that the partnership subsisted until its dissolution on the bankruptcy of Mr Elliott on 29 January 2015. The defenders deny that any such partnership ever existed.
[2] On the strength of their claim that there was a partnership, the pursuers seek certain declarators and other orders against the defenders which, if granted, would entitle them to shares of the profits generated by gay social network apps called “Wapo” and “Wapa”, which, so they contend, are simply re-branded versions of Bender and Brenda. The circumstances in which those particular orders are sought are complex and do not arise for consideration in this appeal.
[3] The Lord Ordinary heard a proof before answer restricted to the following issues:
(a) Was there at any time a partnership as averred by the pursuers?
(b) If so:
(i) When was it formed?
(ii) When was it dissolved or otherwise terminated?
(iii) Who were the partners from time to time?
(iv) What was owned by the partnership from time to time after its formation?
(v) Insofar as the partnership owned property, was that property at any time acquired by Bender Social Networking Limited (“BNSL”) and, if so, how was it acquired from the partnership?
[4] Having heard evidence and submissions on these issues, the Lord Ordinary held that, whatever might have been the nature of the business relationship between the parties, it did not amount to the carrying on of a business in common; and that no relation of partnership subsisted among them with regard to the development and exploitation of the Bender/ Brenda apps from the relevant date in October 2009 or at any subsequent time. That being so, issue (a) fell to be answered in the negative and issue (b) did not arise for determination. He added that, if he had decided that a partnership existed, he would have held that it was a partnership at will terminated by a letter of 9 May 2011 from Mr Elliott to the pursuers.
[5] On 28 October 2016 the Lord Ordinary pronounced an interlocutor in which, consistent with his finding that there was no partnership between the pursuers and Mr Elliott, he assoilzied the defenders from the conclusions of the summons. It is from that interlocutor that the pursuers now reclaim (appeal).
The relevant facts
[6] There was no challenge to the Lord Ordinary’s findings in fact. Accordingly it is convenient to set out the facts as found by him, while omitting much of his rehearsal of the evidence relevant to such findings and his discussion of particular passages in that evidence.
Creation of the parties’ business relationship
[7] The pursuers are professional concert pianists and entertainers who live in Edinburgh (together with a friend, SB). In about 2007 they became friendly with Mr Elliott, who had a keen interest both in computing and in music. The pursuers spent lengthy periods away from home performing on cruise ships and elsewhere, but the friendship was maintained and they all met socially whenever possible.
[8] By 2009 Mr Elliott had moved to Brighton and was working part-time from home as a web developer. In about July 2009 he visited the pursuers and SB in Edinburgh. There was some discussion about the creation of a gay dating app to rival and improve upon others then in the market. The pursuers acknowledged that they had no IT skills but considered that they were experienced in, and good at, promotional activities. The matter was not taken further at that time.
[9] In October 2009, the pursuers were working in Vienna. Mr Elliott went to visit them there for three or four days. One evening, during a discussion among the three of them in a bar after a performance by the pursuers, the idea of developing a gay dating app, and in particular making it a location based app, re-emerged. SB was not present. The discussion in the bar was animated and the prospect was regarded as exciting. The conversation that evening was serious both in its purpose and content, as reflected in an email sent by Mr Elliott on 17 October 2009 (see below).
[10] In the course of the discussion it was agreed that the choice of a name for the app was critical to its success. Mr Worbey came up with the name Bender and everyone agreed that it was a good one. (The name Brenda for the lesbian version of the app was suggested by Mr Farrell at a later date.) Other matters discussed included: a facility to upload photographs; a GPS function to find out which app users were in the proximity; and the possibility of a membership scheme whereby charges could be made for use of the app. Mr Elliott offered to spend time finding out if he could learn how to create such an app; and the pursuers agreed to fund the purchase of a laptop computer to enable him to learn how to create the app.
[11] On 15 October 2009 (at 18.59), after his return home following the Vienna discussion, Mr Elliott emailed the pursuers and SB emphasising the importance of a good means of communicating with each other “so that we can bring our wonderful iPhone app concept in to the real world, making us billionaires in the process…”. He suggested using Google Wave.
[12] Mr Elliott emailed Mr Worbey the next day (16 October, at 12.45) with a link to a MacBook for sale on eBay with the comment “Good specs, good price!” Mr Worbey replied (at 16.16):
"Yes I agree ....erm how about you get it on your c card and Kevin and I pay you the dosh within a month or your bill inc interest? Not got the full dosh at this minute ....alternatively wait a couple of weeks...?”
Mr Elliott responded (at 16.38):
“I think I will just go ahead and get that ebay macbook on my credit card. I need to get stuck in to something like this whilst I'm still feeling the enthusiasm and excitement! Once I'm up and running with it there's no holding me back, but wait too long and I can start to feel as if it's an insurmountable challenge! (which it isn't).”
[13] On 17 October 2009 at 00.37, Mr Elliott sent a lengthy email to the pursuers and SB. In view of the importance placed by the pursuers upon the Vienna discussion, the Lord Ordinary thought it necessary to set out much of the email in full, and we do the same. Under a subject heading “MacBook - Bought. Actions Needed. Recap for [SB]”, Mr Elliott stated inter alia as follows:
“Hi All,
Lots of this email is just going over stuff we spoke about in Vienna, but I'm recapping to get [SB, who had not been at the meeting in Vienna] up to speed. It's very long, Kevin and Steven would only need to read down to the dotted line ... the rest is to fill in [SB].”
After referring to what he called “the bad news”, meaning a temporary delay in being able to communicate by Google Wave, he continued as follows:
“The good news: After speaking to Steven earlier, I've gone ahead and bought a second hand MacBook from eBay!! Way cheaper than a new one. Decided it was best to go ahead and do it now with my credit card so I can get stuck in as soon as possible whilst I'm feeling enthusiastic about the whole thing and have some free time! I have interest free on my credit card for about 6 weeks, so there's no rush for us sorting out the money or anything. It came to £565.99. I'll also go ahead and sign up for the iPhone developer license, which costs £59. Should have both for Monday! Tres exciting!
So, we have two points of action that we need to sort out. I've not spoken to you in ages [SB] so I don't know what you're up to at the minute ... but Steven and Kevin will be really busy with the show finishing up and moving back to Edinburgh! So I'll throw out the two things we need to get sorted, and if we can agree to tackle them within the first week of Steven and Kevin getting home, that would be great.
We need to decide on a name. Steven spontaneously came up with "Bender", which I really like. If apple take issue with it (they might deem it to be offensive considering what the app will be designed for) then we could play with it .... Bendar (playing with gaydar), or Bendr (playing with grindr) for example. There are also good domain names for all three of them available, so we would be able to get an online presence sorted easily, which is probably going to be essential.
We need to get something in writing that just states in basic terms how we all fit together with this. I'm obviously going to be the developer, at least for the foreseeable future… and you guys are going to be a mixture of investors/ marketing gurus etc. To get something up and running, I'll probably be investing hundreds of hours programming, and then when it is running ... there will be constant work to improve it, deal with issues etc. So, to reflect that ... and also to safeguard my control over the application that after all that time will probably feel like "my baby", I said to Steven and Kevin that my only condition would be I have a controlling interest so that if in five years time for example, if it's a massive success and some investor offers you guys an fantastic amount of money to buy you out, but I don't want to ... I can't lose control to them because your shares add up to more than mine. So, what we agreed on the other night was that I have 51%, and the other 49% can be divided up between you three however you fancy.
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Ok. I'm pretty busy this weekend [SB] or I would give you a call, but perhaps Sunday or Monday night?
I have LOADS of ideas for the app to update you on. I think it's going to be really amazing. I'll tell you some of my key concepts here to give you a taster.
- ….[Mr Elliott described a number of “key concepts”, which need not be set out here.]
8. Making money from this. First we create a successful community. We want to be the number 1 gay dating app for the iPhone (and then other phones) the way gaydar has the market online. Once we have done that, we try to figure out how to make money from it. If you start by trying to make money, you are doomed to failure. Here is an idea though, when it gets popular enough, we start charging 59p a month. Who in their right mind would be tight enough not to pay 59p a month? 1f we get 10,000 paying customers which is achievable in the UK alone ... then we are taking in £5,900 a month, or £70,800 a year. I think these are really achievable numbers.
Ok, I think that’s enough for now!
Steven x”
The Lord Ordinary found that in so far as it bore to record matters discussed and/or agreed in Vienna, this email recorded them accurately.
SB’s involvement
[14] Because it was a part of the defenders’ submission that there could have been no partnership when there was uncertainty as to the identity of the partners, the Lord Ordinary then discussed the evidence relating to SB’s involvement. He concluded that SB did not at any time wish to participate financially in the project or convey to any of the others the impression that he did. Any uncertainty as to the nature and extent of SB’s participation subsisted largely in the mind of Mr Elliott; but in any event that uncertainty was not a material consideration in deciding whether a partnership was formed between the pursuers and Mr Elliott at or about the time of the Vienna discussion. The argument was not revived before us. Accordingly, save where it is necessary to make sense of any particular item of correspondence, we shall henceforth ignore the presence of SB in any communications.
The pursuers’ contribution to development of the app
[15] The Lord Ordinary made the following findings about what the parties each considered to be the commitment of the pursuers to the project, and also about what contribution the pursuers in fact made to the development of the app prior to severance of relations by Mr Elliott in May 2011.
(i) Financial contribution
[16] The pursuers agreed that their role could best be described as “a mixture of investors/ marketing gurus etc”. They did not consider that they were obliged to pay any sum of money to Mr Elliott, whether as a one-off payment or a series of regular payments. They could not have agreed to such an arrangement since they were not rich and, as entertainers, their income stream was sporadic and uncertain. They wanted the app to succeed and were willing to contribute financially whenever they could. Their understanding had been that from an early stage the app would be self-financing through, for example, advertising; so there was no question of their being bound to make cash contributions. Their only financial commitment had been to fund the purchase of Mr Elliott’s second-hand MacBook, which they had done. They regarded that as an investment. Mr Elliott’s position, by contrast, was that the pursuers had agreed to cover all the costs of development and exploitation of the app until it reached a stage at which it could fund itself. He would not be required to contribute any of his own money. They had assured him that this would not be a problem; because they were successful and well-connected entertainers, he had had no reason to doubt that they had the resources needed to finance the project.
[17] What in fact happened in this respect was summarised by the Lord Ordinary as follows.
[18] The pursuers fulfilled their promise to reimburse the cost of the MacBook purchased by Mr Elliott, although they did not specifically fund the iPhone developer licence.
[19] For some months thereafter Mr Elliott did not incur any significant expenditure on development of the app and made no requests for funding.
[20] In February 2010, Mr Elliott asked the pursuers to think about what they planned on investing during the following year on matters such as advertising and promotion. The response from Mr Worbey was that they did not have loads to invest. He suggested that Mr Elliott obtain quotes so that they could see what they could do. Mr Elliott reassured Mr Worbey that he was not expecting him “to re-mortgage his house to fund Bender”.
[21] In March 2010, Mr Elliott purchased an iPod Touch for £125, for which he was reimbursed by the pursuers.
[22] On 31 July 2010, Mr Elliott emailed Mr Worbey to update him on his plans for getting a return on Bender, envisaging a potential annual income of “hundreds of thousands”. Mr Elliott continued:
“The bad news is, I was expecting a serious cash injection from you to balance out the time I've invested, and will continue to invest. I've spent about 1300 hours on Bender in the last 10 months, and it will be more this year.
And to be completely honest, the figure I had in mind was £5k. …
At the minute, I've been paying 1/3rd of the running costs. I'd like to stop that completely (when your theatre show starts), and have you guys pay it, and I would like to divert some of the 5k to me, basically to subsidise me so I can afford to quit the PC repairs to spend time on Bender. Something like £100 a month. …
Now, I would completely understand if you just didn't think an amount like 5k was feasible for you. But in that case, I would need to use my own savings (we could even do a split ... however much you could afford, plus my money), and if I was going to be investing the time to develop it, and a good chunk of the money too, then I would obviously need a bigger share which we would need to negotiate. …”
Mr Worbey confirmed in response that the £5,000 was a good figure for them “assuming it's not all in one go”. It would be in smaller amounts until October and would increase from then on.
[23] At around this time the pursuers spent around £300 on the cost of a trade mark application for Bender.
[24] During the next few months, Mr Elliott made a number of requests for money. The pursuers’ response was that they were struggling financially, but they made contributions as and when they could, mainly of amounts of around £40 or £50.
[25] On 26 October 2010, Mr Worbey explained that they were unable to give Mr Elliott anything, but promised that “the three of us” (i.e. the pursuers and SB) would give “our max of £300 per month”. Mr Elliott replied that he had obtained money from his parents and by cashing in premium bonds.
[26] On 8 December 2010 Mr Worbey inquired when Mr Elliott wanted the pursuers to start paying something. A figure of £200 per month for running costs had been mentioned. Mr Elliott responded that he was working on a business plan, that payments would be covered in that, and that it would be great if the payments could start then.
[27] On 14 December 2010, Mr Elliott emailed the business plan to Mr Worbey (though the Lord Ordinary found that Mr Worbey did not pass it on to Mr Farrell or discuss the contents of it with him in any detail). The plan included a number of notable features with regard to the ownership and financing of the project. It envisaged:
(a) the registration of a company called Bender Social Networking Limited, 80% of the shares in which to be held by Mr Elliott and the remaining 20% to be divided among the pursuers and SB.
(b) that Mr Elliott would use his savings to promote Bender over the next year and buy any equipment needed.
(c) that when the app began to earn money, approximately 40% of income would be reinvested in promotional and advertising activities.
(d) that the pursuers and Mr Elliott would invest £250 per month (paid by regular direct debit) to cover running costs for the period, expected to be about a year, until sufficient income came in from advertising to cover costs.
[28] Mr Worbey replied on 16 December 2010 (copied to Mr Farrell and SB) confirming that they had read the business plan a few times and it was “all very clear and exciting”. He agreed that reinvestment of 40% of income seemed reasonable. His comments on the extent of the pursuers’ investment included the following:
“Do we have any say as regards to new features/business decisions etc? for our investment? It may not sound like a lot of money but it is quite a commitment for all of us. I thought we'd agreed on £200 per month and it is a struggle for us to afford more than that. You understand that we're in the entertainment business and we have no idea where we're going to be in six months time financially. We're only just getting bookings for February so even though we're ok at the moment, we may not be in a few months time. Also, [SB] has not yet decided whether he is going to help us out here which would make it even harder for us. You understand the business of show! I think the significant reduction in our share that we've agreed on fairly reflects the amount that we have put in. Obviously that being the original idea of the app, the name 'Bender' and the initial financial investment.”
In response, Mr Elliott proposed £200 per month if only the pursuers were involved or £250 if SB was also in. As already noted, it became clear in due course that SB did not wish to participate.
[29] The pursuers made payments of £200 to Mr Elliott in January, February and March 2011.
[30] On 18 March 2011, Mr Elliott emailed the pursuers offering two options for the future structure of their business relationship. The first was that they became shareholders in the company; the second was a royalty agreement under which they would receive a share of profits. Mr Elliott expressed a preference for the second of these options which, he considered, better fitted the pursuers’ position as “initial investors/co-founders”. As to the first, he commented:
“…the main thing for me would be that if you became shareholders in the company, then we would be stating in law that we are business partners, and I don't think that we are.”
Mr Worbey replied on 1 April 2011 agreeing that “it would be easier for all if we went with the royalties option”. In answer to his enquiry about whether the royalties would be from gross or net profits, Mr Elliott confirmed that they would be from net profits.
[31] On 8 April 2011, Mr Elliott emailed Mr Worbey noting that he had not received the £200 that month. Mr Worbey replied on 11 April:
“I can't apologise enough. Just don't have enough this month. Can't afford mortgage or to even go out. So sorry. Lots of work just come in so only bright word is that the next few months are ok.”
(ii) Non-financial contributions
[32] In response to requests made by Mr Elliott, the pursuers made the following non-financial contributions to the development and promotion of the Bender app:
(1) they reviewed and rated photographs submitted by app users;
(2) they submitted the application for registration of a trade mark;
(3) Mr Worbey learned how to facilitate the recovery of the app if it crashed at a time when Mr Elliott was not available to put it back online;
(4) they tested new versions of the app; and
(5) they were given the facility to ban a user of the app, subject to ratification by Mr Elliott of the decision to ban.
Termination by Mr Elliott of the parties’ business relationship
[33] Following upon the pursuers’ failure to pay £200 in April 2011, Mr Elliott sent a lengthy email to Mr Worbey explaining the financial difficulties that the pursuers’ inability to pay was causing for him. He indicated that he intended to have new agreements drawn up by a solicitor.
[34] However, on 9 May 2011, he sent the following letter (incorrectly dated 2010) to the pursuers:
“Dear Steven and Kevin,
Please find enclosed a cheque for £2225.49. This is the total amount of money paid by you towards the Bender iPhone app project, plus an additional 4% interest. The interest has been calculated on each individual payment from the day it was received. A full breakdown can be found on the following page.
This money is being returned after you were unable to fulfil your obligations as per our agreement, rendering the agreement null and void.
If any mistakes have been made in calculating this total, please don't hesitate to contact me in writing at the above address.
Yours,
Steven Elliott
Bender Social Networking Ltd”
The cheque enclosed by Mr Elliot has not been cashed by the pursuers.
The Lord Ordinary’s decision
[35] The Lord Ordinary noted that partnership is defined in section 1(1) of the Partnership Act 1890 as “the relation which subsists between persons carrying on a business in common with a view of profit”. The Act stated a number of rules to which regard must be had in determining whether a partnership did or did not exist, but there was no single test capable of being applied in every case – all relevant features of the parties' relationship must be examined: per Lord Coulsfield in Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd 1996 SLT 186 at page 191. While certain features of a business relationship had come to be recognised as normal incidents or characteristics of partnership, there was a danger of them being perceived as prerequisites to the existence of the relationship: see Lindley & Banks, Partnership (19th edition, 2010) at paragraph 2-13. They were not. To treat them as such would be to distort the application of section 1(1).
[36] Limited guidance relevant to the present case might be gleaned from some of the rules in section 2 of the 1890 Act. Common property does not of itself create a partnership as to anything so owned, even if the owners share the profits from its use: section 2(1). Sharing of gross returns does not of itself create a partnership: section 2(2). Receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner, but does not of itself create a partnership or make him a partner: section 2(3). Certain other provisions of the Act were also of importance. Every partner is an agent of the firm and of his other partners, so that his acts bind them unless he has in fact no authority to act for the firm in a particular matter: section 5. An act of a partner showing an intention to bind the firm is binding on it and all the partners: section 6. And every partner in a firm is liable jointly and severally with the other partners for all debts and obligations of the firm incurred while he is a partner: section 9, as applied to Scotland.
[37] The Lord Ordinary referred to a number of decided cases in which certain features had been regarded as of particular significance, viz.: Lumsden v Buchanan (1864) 2M 695, a pre-Act case (share of the profits in proportion to interest in the concern, and mutual relief from debts and liabilities); IRC v Williamson (1928) 14 TC 335, 340, cited with approval in Alexander Bulloch & Co v IRC [1976] STC 514 at 519 (agency, community in profits and losses and sharing in the capital); Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd (agreement to share losses, common capital and an element of delectus personae in the membership of the partnership); Pine Energy (Consultants) Ltd v Talisman Energy (UK) Ltd [2008] CSOH 10 (agreement as to capital contribution and percentage profit share). In Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd Lord Coulsfield concluded that although the absence of one or even more than one of the key elements mentioned in IRC v Williamson might be reconcilable with the existence of a partnership, the absence of all of them was not.
[38] Against this background, the Lord Ordinary turned his attention to the question whether in this case there was a partnership among Messrs Worbey, Farrell and Elliott? As to this, he was satisfied that an agreement of a business nature was envisaged by them during the evening in Vienna. All concerned regarded themselves as entering into some kind of business relationship. But not every business relationship entered into by two or more individuals with a view to profit is a partnership. There were other possible analyses. Content had to be given to the words “carrying on a business in common” in section 1(1). That presupposed “…that the parties are carrying on that business for their common benefit and that they have, as regards the business, expressly or impliedly accepted some level of mutual rights and obligations as between themselves”: Lindley & Banks at paragraph 2-06 (emphasis in original). Bearing in mind “the strictures in the authorities against elevating incidents of partnership into spurious prerequisites for the existence of a partnership”, the Lord Ordinary said that the problem for the pursuers in the present case was that beyond the initial proposal of a 51/49 split, there was no evidence of any agreement, express or implied, as to any of the key incidents of a partnership relationship. In particular: (i) there was no evidence that Messrs Worbey and Farrell assumed any obligations whatsoever with regard to liabilities or trading losses; (ii) there was no evidence of a relationship of agency between the pursuers and Mr Elliott; (iii) although the parties did contemplate a capital sharing, they did so in a way that was equally, if not more, consistent with exploitation of common property since the pursuers’ expectation was not a return of what little capital they had contributed but rather a return on capital, consisting of a share of accumulated future trading profits; (iv) there was an absence of delectus personae if, contrary to (iii) above, their shares were regarded as realisable at some future time; and (v) there was no agreement, express or implied, as to whether the pursuers’ entitlement was to be to a share of gross or net profits – there was no evidence as to how any of the parties saw the matter at the time when the business relationship was formed, and Mr Elliott’s confirmation that he had in mind a share of net profits came much later, shortly before he terminated the relationship.
[39] The Lord Ordinary accepted that proof of the existence of the key features of a partnership relationship may be supplied by the actings of the parties during the period when the partnership was alleged to subsist: see per Lord President Clyde in IRC v Williamson. But he considered that such actings did not provide such proof in this case. Messrs Worbey and Farrell proceeded after October 2009 on the basis that they were under no obligation to do anything by way of financial or other contribution beyond providing funds and practical assistance with the development of the app whenever circumstances allowed. Even after agreement was reached that they would contribute £200 per month, their failure to do so in April 2011 was regarded by them as no more than a matter for apology. The formulation of Mr Elliott’s requests for financial contributions did not suggest that he regarded them as then under any obligation to make payment at any particular level, although as 2010 wore on he became increasingly concerned to obtain a firm commitment for the future. Mr Worbey saw this simply as Mr Elliott “asking for more and more money”.
[40] Mr Elliott was concerned to obtain a firm commitment for the future. That culminated in the preparation by him of the business plan which he sent to Mr Worbey on 14 December 2010. As already stated, Mr Worbey did not show that to Mr Farrell at the time or discuss its contents with him in any detail. For present purposes the relevance of that, as found by the Lord Ordinary, is twofold. First, it suggests that Mr Worbey was concerned that there were aspects of the business plan, such as the proposed 80/20 split, which would have been unwelcome to Mr Farrell. Second, and of greater significance, it suggests that the Bender project generally, and the business plan sent by Mr Elliott, was not given a high degree of priority at the time by either Mr Worbey or Mr Farrell, who both had busy performing schedules to meet.
[41] The Lord Ordinary accepted that there were similarities between the parties in this case and those in Medcalf v Mardell & Ors (21 May 1998, unreported) where Lloyd J had found there to be a partnership despite the embryonic state of the business: the agreement was informal and unexecuted, there was no clear formulation of the method of calculation of profits, trading with third parties had not begun and profits, if any, would only arise much later. The Lord Ordinary accepted, under reference to Khan v Miah [2000] 1 WLR 2123, per Lord Millett at 2127, that a partnership may come into existence long before trading with third parties has commenced, provided that the persons concerned have actually embarked on the activity in question. But he held that there were material differences. In the present case, in contrast to Medcalf, there was no express or implied agreement as to what were the parties’ respective obligations, or how any losses would be shared, despite the fact that there was scope for incurring losses; and none of the parties in Medcalf could be described as an “investor”. He was not persuaded that any of the similarities between the two cases led to the conclusion that a partnership came into existence in the present case.
[42] The Lord Ordinary’s conclusion on the issue was summarised in paragraph [37] of his Opinion. Having regard to all of its relevant features, he held that the parties’ relationship did not amount to the carrying on of a business in common, and that no relation of partnership subsisted among them with regard to the development and exploitation of the app, either immediately after the meeting in Vienna in October 2009 or at any subsequent time. That being so, he answered issue (a) in the negative. The questions in issue (b) did not arise for determination. He added, however, that had he held that there was a partnership, he would have held it to be a partnership at will terminated by Mr Elliott’s letter of 9 May 2011.
[43] The Lord Ordinary went on to make two comments about the nature of the relationship between the parties which are of some importance for present purposes.
[44] First, he considered that the evidence supported Mr Elliott’s description (in his email of 17 October 2009) of the pursuers’ role as being that of “investors/ marketing gurus etc” who expected, in return for contributions of a financial and non-financial nature which would enhance its value, to receive a return from the development of the app. That was consistent with their decision, when offered the choice in March 2011, to choose an entitlement to royalties rather than an equity share in the proposed company.
[45] Second, he found that the parties’ negotiations as to the pursuers’ rights and duties never reached the stage of a concluded contract. In determining whether parties intended to enter into a contract, the court must adopt “an entirely neutral approach”: Royal Bank of Scotland v Carlyle 2015 SC (UKSC) 93 at paragraph 29. Contracts were not to be lightly implied, and before implying one the court must be able to conclude with confidence that the parties intended to create contractual relations and that the agreement was to the effect contended for (Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195 at 1202). In the present case he considered that there was insufficient consensus among the parties to create a contractual relationship. There was never consensus as to the nature or extent of the pursuers’ obligations; their view that they had no obligation to make any particular financial or other contribution was obviously not shared by Mr Elliott who, from the time when expenditure began to be incurred, tried persistently to obtain a firm commitment. Nor was there consensus as to the nature or extent of the pursuers’ entitlement to a return. Even at the proof the pursuers were unclear as to what the 51/49 division referred to, and there was never any agreement to the amendment of such division to 80/20 in Mr Elliott’s favour. The fact that work was done, and expense incurred, both by Messrs Worbey and Farrell and by Mr Elliott, preparatory to the entering into of a contract was an entirely normal state of affairs and did not give rise to any inference that the stage of binding contractual relations had been reached. References in the email correspondence to an “agreement” were not inconsistent with a common intention to enter into contractual relations once the terms thereof had been finalised. The parties’ business relationship was one in which it was their common intention that the pursuers would acquire an interest consisting of a right to a share of the proceeds of exploitation of property consisting of the app, but in which consensus was never reached as to the terms upon which that right was to be obtained.
Submissions
Pursuers/ Reclaimers
[46] For the pursuers and reclaimers, Mr Smith QC invited the court to allow the appeal; recall the Lord Ordinary’s interlocutor of 28 October 2016; answer Issue (a) (as to the existence of a partnership) in the affirmative; find that a partnership existed between the pursuers and Mr Elliott between 17 October 2009 and 9 May 2011 for the exploitation of the Bender and Brenda apps; and quoad ultra remit the case to the Lord Ordinary to proceed as accords.
[47] In presenting his argument, Mr Smith adopted to a large extent his Note of Argument. We qualify it in this way because although in that Note of Argument Mr Smith accepted that the findings of primary fact made by the Lord Ordinary were open to him on the evidence, and also accepted the limitations on the power of an appellate court to interfere with a judgment on the facts as recently restated in McGraddie v McGraddie 2014 SC (UKSC) 12 and Henderson v Foxworth Investments Ltd 2014 SC (UKSC) 203, it was submitted in the Note of Argument that the question whether a partnership existed in light of those findings of primary fact was one of mixed fact and law as to which this court was in as good a position as the Lord Ordinary to decide the issue. In his oral submissions Mr Smith expressly departed from this submission. Before this court, however, recognising that the “mixed fact and law” analysis placed him in the position of having to show that the Lord Ordinary had gone fundamentally wrong in his analysis, he submitted that the question whether a partnership existed was not a question of mixed fact and law at all but rather a question of pure law as applied to the facts found by the Lord Ordinary.
[48] We explain this to underline the fact that the submissions made on behalf of the pursuers were focused on a narrow point of law. In short, the submission was that, having found (in paragraph [30]) that the pursuers and Mr Elliott by their emails and subsequent actings made clear that they regarded themselves as entering into some kind of business relationship with a view to profit, it followed as a matter of law that the Lord Ordinary ought to have found that a partnership existed. The “threshold test” in section 1(1) of the 1890 Act was met; and the legal conclusion must be that there was a partnership. The findings of fact made by the Lord Ordinary led, as a matter of law, to the conclusion that there was a partnership. There was no evaluative exercise to be applied to those fact findings; it was a purely legal question.
[49] In answer to a question from the court directed to the absence of any finding by the Lord Ordinary that the pursuers and Mr Elliott were carrying on a business “in common”, part of the definition within section 1(1) of the 1890 Act, and indeed his conclusion (in paragraph [37]) that their relationship did not amount to the carrying on of a business in common, Mr Smith submitted that this was a question of law, not fact nor mixed law and fact, and involved no evaluation of the relationship beyond reaching the automatic conclusion, which the Lord Ordinary ought to have reached, that if they were carrying on business with a view to profit they were doing so “in common” and therefore in partnership.
[50] Mr Smith submitted that although the Lord Ordinary had (in paragraph [31]) warned himself against elevating incidents of partnership into spurious prerequisites for the existence of a partnership, that is what he in fact had done. He had relied upon the absence of agreement as to the sharing of liabilities and losses, the absence of any relationship of agency, the absence of any firm agreement on sharing of capital such as to point in the direction of partnership as opposed to some other arrangement, and the absence of any agreement express or implied as to whether the pursuer’s entitlement was to be a share of gross or net profits. These were not decisive and should not have been treated as such. The policy of the law was to try to enforce bargains, not to defeat them and, if agreement has been reached, to seek to make the agreements work rather than seek to destroy them: R&J Dempster Ltd. v Motherwell Bridge Engineering 1964 SC 308, Carlyle v Royal Bank of Scotland 2015 SC (UKSC) 93. The 1890 Act provided a series of default rules applicable to a partnership to deal with the situation where details of that sort had not been agreed. Having held that the parties entered into a business relationship with a view to profit, the Lord Ordinary ought to have held that other possible analyses were eliminated. No other type of business relationship was contended for; the choice was therefore binary, partnership or nothing; and partnership was the correct and only analysis.
[51] Applying the facts found by the Lord Ordinary, Mr Smith submitted that the parties had agreed to share the cost of the venture and the risk of its failure, albeit they took steps to limit the scope for losses to be incurred. They envisaged profit and the necessity to make more detailed arrangements for the sharing of that profit, but that did not prevent them being bound by the default rules in the intervening period. The fact that the putative partners did not discuss each and every aspect of the operation of the business, their liability inter se and other aspects of what may be part of complex partnership agreements, did not mean that there could not be a simple agreement with the law filling any gaps in the arrangement to make it capable of operation. Parties are free to agree between themselves such arrangements for the management of the partnership business as might be convenient. In this case they appeared to have agreed that expenditure would only be incurred by prior agreement and that they would proceed wherever possible by prior agreement. That was not inconsistent with the relationship of partnership. If there were to be fundamental disagreements in the future, the partnership terms could be renegotiated or the partnership terminated. Events after the formation of the partnership were irrelevant to the existence of a partnership but might be evidence of it. The conduct of the parties after the initial agreement pointed to a firmly established partnership. The pursuers made payments to Mr Elliott and communications took place between them which could only have been on the basis that a partnership had been concluded. However, in accordance with the Lord Ordinary’s decision on matters of fact, the requirements of a partnership were established at the outset.
[52] Finally, Mr Smith referred to the decision of Lloyd J and subsequently, the Court of Appeal in Medcalf v Mardell (both unreported 21 May 1998 and 2 March 2000, [2000] EWCA Civ 63) as a case which was “properly to be seen as on all fours”. We did not understand him to be suggesting that this case raised any particular point of principle; rather his submission was that if in that case there was a partnership, so also a partnership should be held to exist in the present case.
Defenders/Respondents
[53] For the first and second defenders and respondents, Mr Dunlop QC moved the court to refuse the reclaiming motion. He submitted that the Lord Ordinary’s conclusion was unassailable, for three reasons.
[54] The first was that the Lord Ordinary had made findings in fact that there was no consensus ad idem between the parties and no intention to create legal relations at that time. As was made clear in Lindley and Banks at paragraph 2-15, partnership derived from contract; and the first question was whether there was anything in the nature of a contract between the parties. The Lord Ordinary found (in paragraph [39]) that the parties’ negotiations as to the pursuers’ rights and duties never reached the stage of a concluded contract. The intention of the parties was that they would enter into a contract in the future, once the terms had been finalised; but they never reached that stage. That was a finding of fact with which this court should not lightly interfere, just as much as the finding in Carlyle v Royal Bank of Scotland that there was in that case an intention to create legal relations.
[55] The second reason was that, even if there was a binding agreement, the pursuer needed to show that the Lord Ordinary was wrong in his evaluation of the facts and in his conclusion that whatever was before him was not a partnership. Partnership was a contract, but not just a contract. It was also a status. In the present case the pursuers asserted a partnership the formation of which was inferred from conduct, but it was well settled that a contract was not lightly to be inferred from conduct. It was necessary for the conduct to be unequivocally referable to the creation or existence of a contract: Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274. He submitted, in answer to a question from the court, that the initial payment made by the pursuers could be explained by reference to the anticipated sharing of the intellectual property to be created by means of the app. It was payment made in anticipation of a contract, but what the nature of that contract might be was left unresolved. It might be a partnership under the 1890 Act; but it might equally be a limited liability partnership, a limited company or a joint venture; or the pursuers might be treated as investors in the product. If it was held that there was a legally binding agreement, it was an evaluative exercise in determining whether that agreement was a partnership. That was a question of fact. It had been described as a jury question.
[56] The third reason was that, even if it was wrong to describe the exercise carried out by the Lord Ordinary as an evaluative exercise, and it was permissible and appropriate for this court to look at the findings in fact so as to determine the question for itself, that still did not help the pursuers. Those findings were destructive of the notion of partnership. The Lord Ordinary made it clear (at paragraph [31]) that he was not making the mistake of elevating the indiciae of partnership into rules. Nonetheless, as the Lord Ordinary recognised, the decided cases identified facets of the relationship – such as mutual agency, community in profits and losses, shared capital and delectus personae – which were often regarded as key attributes of partnership and the absence of which pointed against there being a partnership. The Lord Ordinary correctly identified the role played by the pursuers as being that of “investors”, consistently with their own description of themselves in evidence at the proof. Many of the “default rules” in the 1890 Act were inconsistent with what the parties had envisaged in their negotiations. To hold that there was a partnership on the terms of these default rules would, in effect, be making a bargain for the parties on terms which none of them wanted or would have agreed to: Pine Energy v Talisman at paragraph [29].
Discussion
[57] As ultimately presented, the appeal raises a short and narrowly focused question of law, namely: whether, having held (in paragraph [30]) that “all concerned [i.e. the pursuers and Mr Elliott] regarded themselves as entering into some kind of business relationship with a view to profit, the Lord Ordinary was bound, as a matter of law, to hold that they had entered into a partnership between themselves for the purpose of developing, promoting, preparing, marketing and exploiting certain gay dating apps. We express the question in this way because, in presenting his argument in support of the appeal, and having accepted the findings of primary fact made by the Lord Ordinary, Mr Smith QC submitted that the question whether on those facts a partnership existed was not one of “mixed fact and law”, the position taken in his Note of Argument, but was a question of “pure law”. His submission was that on the primary facts found by the Lord Ordinary, which he did not challenge, it followed as a matter of law that there was a partnership at the relevant time. (We should note in parenthesis that Mr Smith began to address the court on the line of authority – recently rehearsed by the Supreme Court in cases such as McGraddie v McGraddie 2014 SC (UKSC) 12, Henderson v Foxworth Investments Limited 2014 SC (UKSC) 203, Royal Bank of Scotland v Carlyle 2015 SC (UKSC) 93 and, as regards Northern Ireland, DB v Chief Constable of Police Service of Northern Ireland [2017] UKSC 7 – concerning the limits on the power of an appellate court to reverse findings of fact made by a judge who has heard the evidence. However, prompted by interventions from the bench, he accepted that, in light of his acceptance of the Lord Ordinary’s findings of fact, it was unnecessary for him to address the court on this question. The point simply did not arise.)
[58] Having carefully considered the submissions made to us on both sides, and having looked carefully at the Lord Ordinary’s findings in fact and reasoning as set out in his opinion, we have come to the conclusion that this appeal, thus presented, must fail. We have reached this conclusion for two main reasons.
[59] The first reason is that, even if the Lord Ordinary’s findings are to be understood as meaning that the parties had entered into a business relationship with a view to profit, it would not follow that, as a matter of law, that relationship was necessarily one of partnership. What needs to be established, if it is to be proved that there is a partnership, is that they were carrying on the business “in common”. Many people carry on business together with a view to profit without being in partnership. There are a number of other possibilities and the question of whether the relationship is one of partnership or of some other kind depends upon whether it can be established that they are carrying on that business together “in common”. That is not a pure question of law but depends upon further fact findings and the making of an evaluation of all the facts.
[60] The second reason – we deal with it second, though logically it addresses a prior and more fundamental issue – is that, properly understood, the Lord Ordinary makes no finding that the parties had at any material time actually entered into a business relationship with a view to profit; on the contrary, he finds that although they envisaged entering into some kind of business relationship in the future, they had not actually reached the stage of a concluded contract; and therefore the question whether their relationship amounted to a partnership did not arise.
[61] We explain our reasoning on these points in more detail below.
[62] It is convenient here to identify the relevant provisions of the 1890 Act. “Partnership” is defined in section 1(1) in the following terms:
“(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.”
It is to be noted that the definition uses the definite article in the expression “the relation which subsists …” (emphasis added). It is not “a relation”, i.e. one of a number of possible alternatives, which subsists in such circumstances; it is the relation. Accordingly, if it is established on the evidence that two or more persons carry on a business in common with a view to profit, then as a matter of law they are in partnership together.
[63] Section 2 sets out a number of rules for determining whether or not a partnership exists. We consider these rules below, but for present purposes the important point is to consider how these rules are to be applied consistently with the notion that in every case where persons carry on a business in common with a view to profit there is, as a matter of law, a partnership. The answer appears to be that these rules are to be applied in deciding whether it is made out on the evidence that the relevant persons are indeed “carrying on a business in common with a view of profit”. If they are, then, as we have said, there is a partnership. Except for what we might call the “temporal” question resolved in Khan v Miah [2000] 1 WLR 2123 (which established that there was no rule of law that parties to a joint venture did not become partners until actual trading had commenced), there can be no difficulty in determining whether persons are carrying on a business or are doing so with a view to profit. It follows, therefore, that the rules in section 2, and indeed the other matters mentioned in later sections of the Act, reflect matters to be taken into consideration primarily in determining whether or not the business being carried on by the parties is being carried on “in common”.
[64] What is meant by the words “in common” as used in section 1 of the Act? The words are not defined in the Act but it is clear that they add something of significance to the definition (as it would otherwise stand without these words) “persons carrying on a business … with a view of profit”. After all, many people carry on a business with a view to profit in a number of different ways without being in partnership. Lindley & Banks, Partnership (19th edition) at paragraph 2-06, suggests that the term “in common” necessarily means that there must be a single business; and, in the view of its current editor, the term “also presupposes that the parties are carrying on that business for their common benefit and that they have, as regards the business, expressly or impliedly accepted some level of mutual rights and obligations as between themselves.” That passage (in its current or previous form) has been cited with approval on a number of occasions: see, for example, Brostoff v Clarke Kenneth Leventhal (1996, unreported), Thames Cruises Limited v George Wheeler Launches Limited [2003] EWHC 3093 (Ch) at paragraph 49, Primlake Limited v Matthews Associates [2006] EWHC 1227 (Ch) at paragraph 326 and Marsh v Marsh [2010] EWHC 1563 at paragraph 10. In a footnote to that passage in Lindley & Banks it is observed that in Whywait Pty Ltd v Davison [1997] 1 Qd. R. 225, 231 the court expressed the view that partnership involves a “relation of mutual confidence”. Similar expressions are to be found in other cases both before and after the 1890 Act: see, for example, Re Agriculturist Cattle Insurance Co, Baird’s Case (1870) LR 5 Ch App 725, per James LJ at page 733 and Birtchnell v Equity Trustees Executors & Agency Co Ltd [1929] HCA 24, per Dixon J at page 41. This is implicit in the fact that the parties are carrying on business “in common”, for their common benefit; and it reflects the fiduciary nature of the relationship.
[65] In light of this, even if the Lord Ordinary had found as a fact that the parties had entered into a business relationship with a view to profit, it would not follow as a matter of law that they were carrying on such business “in common” and therefore in partnership. Were that to be the case, the words “in common” would add nothing. Almost every relationship between parties pursuant to which they carried on business with a view to profit would be classified as a partnership, unless excluded by the terms of section 1 (2) of the 1890 Act. Every joint venture would be a partnership. A company and its employees would be in partnership. The several parties to a construction contract would be in partnership with each other. Parties would find themselves to have been in partnership simply because they were working together in anticipation of concluding a contract. This is not the law – but it would be a consequence of failing to give proper regard to the important words in the definition of partnership, “carrying on a business in common”.
[66] When the court is considering the evidence in order to determine whether the relationship between the parties is one of partnership, in other words when deciding whether parties who are carrying on business with a view to profit are carrying on that business in common, it is evaluating the facts found to be established so as to assess the characteristics of the relationship in question against what might be regarded as the normal incidents or characteristics of partnership. It is to this evaluative exercise that the guidance given by the 1890 Act itself is of particular relevance. Certain aspects of the relationship, such as agency (sections 5 and 6) and joint and several liability (section 9), are of importance to the existence of a partnership. The factors mentioned in section 2 to the 1890 Act (“Rules for determining the existence of partnership”), although not to be elevated into prerequisites of such a relationship (see Lindley & Banks at paragraph 2-13), are factors which may be of greater or lesser importance in any particular case. Thus, subsection 2(1) provides that joint tenancy, tenancy in common, joint property, common property or part ownership of property does not of itself create a partnership as to anything so held or owned, whether or not the tenants or owners share any profits made by the use of that property. Subsection 2(2) provides that the sharing of gross returns does not of itself create a partnership whether or not the persons sharing such returns have any joint or common right or interest in the property from the use of which the returns are derived. And subsection 2(3) provides that although receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, the receipt of such a share or of any payment contingent on or varying with the profits of the business does not of itself make that person a partner in that business. It then sets out in lettered sub-paragraphs a number of examples falling within and illustrating the proposition set out in subsection (3). These include (b) a contract for the remuneration of a servant or agent by giving them a share of the profits of the business, and (d) the loan of money to a person engaged in any business on terms that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from the business. In neither case is there necessarily a partnership, notwithstanding that the parties are carrying on business together with a view to profit. Putting the matter broadly, what section 2 makes clear is that the carrying on of business (in whatever way) by a number of individuals with a view to making a profit and sharing such profits between them does not necessarily mean that there is a partnership. The matter is pre-eminently one for the first instance judge hearing all the evidence and submissions pertaining to the business relationship between the parties.
[67] It follows, as already made clear, that we reject the submission that it followed as a matter of law from the Lord Ordinary’s findings of fact that there was a partnership. But we would not wish to rest our conclusion on this narrow ground. We are satisfied that the Lord Ordinary was fully entitled to conclude, as he did, that, on the facts as he found them to be, there was no partnership between the parties. The Lord Ordinary considered all the relevant factors. He held (at paragraphs [31]-[32]) that the pursuers assumed no obligations whatsoever with regard to the liabilities of the business, such as it was by that stage; that there was no evidence of agency in the sense that neither the pursuers nor Mr Elliott had any authority to bind the others to any particular project or expenditure; that although the parties contemplated a sharing of the capital, the pursuers did not anticipate a return of capital so much as a return consisting of a share of accumulated future or trading profits; that there was no agreement or understanding between the parties as to delectus personae; and there was no agreement as to the pursuer’s entitlement to a share of profits and, if so, whether of gross or net profits. Having considered the importance of the various factors as shown by the case law, he came firmly to the conclusion that whatever may have been their relationship, “it did not amount to the carrying on of a business in common”: see paragraph [37]. His ultimate conclusion, as set out at paragraph [38], was that the pursuers’ role was aptly characterised, in their own terms, as “investors/marketing gurus etc”. They were, in short, investors in the intended business as opposed to members of a partnership. This was an assessment which the Lord Ordinary was fully entitled to make. We see no grounds for interfering with that assessment.
[68] That is the first substantive reason for concluding that this appeal must fail. But the second reason is equally conclusive. As is made clear in Lindley & Banks at paragraph 2-15, a partnership is, or at least results from, a contract. On any view, before a partnership can be found to exist, it must be established that the parties entered into a contractual relationship. That may, of course, be established by conduct, but, as in the case of any contract, there must be consensus ad idem, certainty of terms and an intention to create legal relations.
[69] In paragraph [30] of his opinion the Lord Ordinary held that an agreement of a business nature “was envisaged” by the parties during their evening together in Vienna. Their subsequent actings made it clear that they all regarded themselves “as entering” into some kind of business relationship. Nowhere in that paragraph does he find that they had in fact entered into a concluded business or contractual relationship at any relevant time. In subsequent paragraphs he makes it clear that during the period in question they were still uncertain as to how their relationship would work and on what basis the pursuers were to get some return for their investment. In paragraph [39] he found, as a fact, that the parties’ negotiations as to the pursuers’ rights and duties “never reached the stage of a concluded contract”. In so far as the pursuers sought to rely upon a contract to be implied from the parties’ actings, he noted that contracts were not lightly to be implied; and he held, in effect, that such actings, if relied upon in support of an implied contract, had to be unequivocally referable to the existence of a concluded agreement. As a legal test we consider that that was accurate. He went on to hold, as a fact, that there was insufficient consensus among the parties to create a contractual relationship. There was no consensus as to the nature or extent of the pursuers’ obligations. Nor was there any consensus as to the nature or extent of the pursuers’ entitlement to a return on their investment. It was entirely normal that work should be done both by Mr Elliott and by the pursuers preparatory to the entering into of a contract. The carrying out of that work did not give rise to any inference that the stage of binding contractual relations had been reached. Nor were references in the e-mail correspondence to an “agreement” inconsistent with a common intention to enter into contractual relations once the terms thereof had been finalised. The Lord Ordinary summarised his views in paragraph [40] by characterising the business relationship between the parties “as one in which it was their common intention that the pursuers would acquire an interest consisting of a right to a share of the proceeds of exploitation of property consisting of the app, but in which consensus was never reached as to the terms upon which that right was to be obtained.” Put shortly, the parties were working together in anticipation of concluding an agreement in the future on terms which were yet to be finalised.
[70] In Royal Bank of Scotland plc v Carlyle at paragraph [28] the question whether, on an objective assessment, the bank intended to make a legally binding promise was said by the Supreme Court to be a question of fact for the Lord Ordinary. The finding by the Lord Ordinary in this case that the parties had not yet reached the stage of entering into a contract – whether that be a finding that they did not yet have the intention to be bound, or a finding that they had not yet reached consensus as to the terms to which they were willing to agree, or both – is equally a finding of fact with which this Court should not interfere.
[71] Mr Smith QC did not seek to argue that the Lord Ordinary was wrong in that conclusion. Rather he submitted that the intention of the parties was irrelevant. In circumstances where the parties were working together in developing and promoting the app, the court could and should find that a partnership existed on the terms thus far agreed between the parties as supplemented by the provisions of the 1890 Act; and that even though there was no intention on their part to enter into a contract at that stage. The test as to whether there was or was not a partnership was an objective one. That turned on whether the terms of section 1(1) of the 1890 Act were satisfied, i.e. whether as a matter of fact the parties were carrying on business in common with a view of profit. If they were, then what the parties thought about their relationship was nothing to the point. Nor was the fact that they had not yet reached agreement on important points. Thus, for example, the fact that the parties had not yet reached agreement as to their appropriate percentage interest in the business and/or in the profits (gross or net) derived from the business did not matter; absent agreement the default rules in the 1890 Act would apply.
[72] We are unable to accept that submission. We accept, of course, that the test as to whether there is or is not a partnership is an objective one. A partnership may exist even though the parties did not think they were in partnership and have sought to characterise their relationship in some other way. But any objective assessment of whether or not there is a partnership must include an assessment of the logically prior question of whether there is a contract between the parties at all. This is clear from the case law, summarised in Lindley & Banks at paragraph 2-15, that a partnership is or results from a contract and that the ordinary rules of contract formation apply. Unless parties are sufficiently ad idem as to all essential terms there can be no contract between them. That is not to say that if, objectively, it is clear from their words or conduct that they intend to enter into a contract, despite not having agreed on everything, and that contract would objectively be characterised as a partnership, some of the gaps in their agreement could not be filled by reference to the default provisions of the Act. But that assumes that there is, in the first place, a contract, and the Lord Ordinary has held that the parties had not yet reached the stage of contracting. Secondly, Mr Smith’s submission would cause great practical and legal difficulties. On his analysis, as we understood it, the court would be required to hold that there was a partnership between the parties with the object of promoting and developing the app on terms to be imported from the Act, save where express agreement had been reached between the parties. The example canvassed in argument related to the parties’ share in the capital and profits of the business. What had been proposed by Mr Elliott in his e-mail following the meeting in Vienna was a split in terms of which he had 51% and the other 49% was to be divided up between the pursuers (with or without SB) as they thought fit. He proposed this because, as he made clear, he wanted to retain control of the business. The Lord Ordinary took the view that this 51/49 split related to the parties’ respective capital share, but nothing turns on this. This was not discussed again and never went beyond a proposal. Yet if, as contended for by Mr Smith, a partnership is held to have been concluded on terms imported from the 1890 Act, it would follow in terms of section 24(1) of the Act that Messrs Worbey, Farrell and Elliott were each entitled to a one third share in the capital and profits of the business and were each obliged to contribute equally towards the losses of the business. That would be a result that none of the parties contemplated, and Mr Elliott would have lost control of the business, the very thing which his proposal of a 51/49 split was designed to protect. Another example is agency. The Lord Ordinary found as a matter of fact that the pursuers did not authorise Mr Elliott to incur expenditure in the development of the app and nor did Mr Elliott authorise the pursuers to commit him or the business to anything. Yet in terms of section 5 of the 1890 Act, if a partnership were held to exist it would be a feature thereof that the acts of each one of them would bind the other. These are but two examples of the consequence of Mr Smith’s argument. Parties would, on his analysis, be bound by terms which not only had not been agreed but which, in some cases, it was clear that neither party wanted: c.f. Pine Energy at paragraph [29]. In our view that makes no commercial sense.
Disposal
[73] For all these reasons the appeal is refused. Questions of expenses are reserved.