[2009] CSOH 102




in the cause








Pursuers: Edward, Solicitor; Maclay Murray & Spens

2nd-10th Defenders: Duncan; HBM Sayers

11th-13th Defenders: Haywood, Solicitor; Biggart Baillie LLP

14th Defender: Hawkes; Anderson Strathern

14 July 2009

[1] The parties formerly practised in partnership as solicitors under the name of Morison Bishop. The partnership was dissolved with effect from 31 July 2002, and thereafter the pursuer raised the present action in order to have the final accounts of the partnership determined. The action has proceeded in a manner similar to an action of accounting, with one important difference: using the flexibility of commercial procedure, it was decided at an early stage that the pursuer rather than any of the defenders should lodge accounts, and that objections to those accounts should be lodged by the defenders. This occurred because the pursuer had draft accounts available when the action started, and those were lodged in process at an early stage. The defenders lodged objections to those accounts. Thereafter extensive discussions took place between the parties and their accountants as to the contents of the accounts and the disposal of the heritable properties that had been occupied by the partnership. It is not necessary to go through the history of these negotiations because agreement has been reached on nearly all of the matters that were in dispute. Nevertheless, certain disputes remain.

[2] The disputes that are relevant for present purposes relate to the position of the eleventh, twelfth and thirteenth defenders and, separately, the fourteenth defender. When the firm of Morison Bishop was dissolved, the majority of the partners joined one or other of two successor firms, Bishops in Glasgow, of whom the pursuer and the fifteenth to twenty fourth defenders became partners (although some have subsequently retired from the firm), and Morisons in Edinburgh, of whom the second to tenth defenders became partners. The Bishops group of partners have subsequently merged with Brodies. The remaining partners either retired or joined other firms. The eleventh, twelfth and thirteenth defenders (who have been referred to as "the pensions group") joined Biggart Baillie, where they became partners. The fourteenth defender, Mr Alan Grossett, had retired from the partnership shortly before the dissolution; consequently he is in a unique position.

[3] Both the pensions group and Mr Grossett have lodged notes of objections to the accounts lodged in process. These raise different grounds of objection, and for that reason I will deal with them separately. The other compearing parties, namely the pursuers and the second to tenth defenders, moved me to repel the respective notes of objections as irrelevant. In his written note of argument the pursuer moved that decree de plano should be granted for payment to the pursuer of the sum of £106,792; that sum represented the total of the balances at credit in the pursuer's capital and current accounts in the dissolution accounts lodged in process together with certain accrued interest. In addition, the pursuer sought interest on that sum at the judicial rate until the date of payment. The second to tenth defenders concurred in that motion in their note of argument. Nevertheless, when the matter came to debate, the solicitor for the pursuer moved me to repel the objections on behalf of the pensions group and Mr Grossett and thereafter to grant a continuation for one month, to enable matters in dispute between the Bishops group and the Morisons group to be resolved.

Objections by the pensions group
[4] The principal objection taken by the pensions group relates to changes made in the figure for work in progress in the draft dissolution accounts lodged in process. The pensions group contend that an earlier draft of those accounts, produced towards the end of 2007, formed the basis of an agreement between the parties in December 2007. Under that agreement, it is said, the pensions group undertook to agree and sign the final accounts of the dissolved firm provided that the final accounts "substantially reflected" the earlier version that had been produced towards the end of 2007. The draft accounts that have now been lodged in process differ from those earlier draft accounts in that the value of work in progress has been increased by £412,444. The pensions group contend that that adjustment concerns matters discussed between representatives of the pursuer, the second to tenth defenders and the fifteenth to twenty fourth defenders, and is not intended to have an adverse effect on the position of the pensions group. Nevertheless, the pensions group will be adversely affected because the higher valuation of work in progress results in an increased profit for the dissolved firm and a consequent increase in the tax for which the partners are liable. In that way the pensions group will be required to pay extra tax without receiving any commensurate allocation of the additional profit. The pensions group are treated differently from the pursuers and the second to tenth defenders and fifteenth to twenty fourth defenders because they carried over a relatively small part of the firm's work in progress. For that reason it was agreed that they should receive a payment of £50,000 as representing their interest in goodwill. That is a fixed amount based, it is said, on the financial position of the dissolved firm as disclosed in the draft accounts that were available in December 2007, and the subsequent change in work in progress has the effect of altering that position in a material respect. Consequently the pensions group moved that the accounts should be examined by the court and appropriate corrections made. The pensions group's motion was resisted by the pursuers and the second to tenth defenders; they contended that it was not competent to use objections to accounts to raise an issue that had nothing to do with the statement of as accounts but rather went to the terms on which an agreement settling certain of the matters in dispute had been reached.

[5] It is important to note that the foregoing argument for the pensions group has been raised in objections to accounts. The function of such objections is described by Lord Coulsfield in Wylie v Corrigan, 1999 SC 97, at 102:

"[T]he procedure in an action of count reckoning and payment is in some respects cumbersome...However,... the purpose of the procedure is to get an account before the court and focus, by that means, the issues in dispute between the parties, so that the true balance can be ascertained...In the ordinary course,...once [an order for accounts] has been made, the accounts are lodged, objections, if any, are also lodged in due course and a record is then made up on the accounts and note of objection and answers, if any".

Thus the function of objections is to enable draft accounts to be adjusted in such a way as to bring out the true balance that is due. It follows that objections should only be used to determine the correct entries going into the accounts. They should not be used to serve any wider purpose. This point is made by Sheriff N M L Walker in Guthrie v McKimmie's Trustee, 1952 SLT (Sheriff Court) 49:

"Objections are not a vehicle for general criticisms of the trust administration. Their purpose is to show that the balance brought out in the accounts as due to the pursuers ought to be larger, either because the defender has taken credit for some sum to which he was not entitled to credit or because he has failed to debit himself with some amount as he ought to have done, and each objection, which should deal with a particular item, must be supported by relevant averments".

[6] It is accordingly necessary to determine the precise nature of the objection that is taken to the accounts, to determine whether it proposes a proper adjustment to the accounts or whether it rather raises an issue that goes beyond the use of the accounts to ascertain the true balance that is due as between the parties. In my opinion the principal objection taken by the pensions group falls into the latter category. That objection relates essentially to the terms on which the pensions group agreed to compromise their entitlements in relation to the estate of the dissolved partnership. The critical issue in dispute in December 2007 appears to have been the amount of the pensions group's entitlement to work in progress. It was agreed that their entitlement should be included in the accounts at the sum of £50,000. That agreement was incorporated into a draft minute of agreement, a copy of which was produced. I note that the minute of agreement is described as a draft. It was not clear what the significance of this was; on one view it might be thought that no finally binding agreement had been concluded until the draft was put into final form and executed, or at least until the whole of the parties had assented to its final terms. If that is so, the agreement is simply not binding at this stage. That does not appear to be the position taken by the pensions group, however. Instead, they contended that the agreement was concluded on the basis that they would agree and sign the final accounts of the dissolved firm provided that those accounts "substantially reflected" the version of the accounts that was available in December 2007. On that basis, the pensions group's argument appears to be that a fundamental condition of their agreement has not been fulfilled because other parties have agreed that the dissolved firm's work in progress should be substantially increased. If that is so, the consequence would appear to be that the agreement is not binding. A further possible argument might be that any agreement was concluded under essential error; at the time when agreement was reached in December 2007 parties understood that total work in progress would be valued at one figure, but in the event that has turned out to be wrong because the parties other than the pensions group and Mr Grossett have subsequently agreed that it should be valued at a higher figure.

[7] It is not necessary for present purposes to determine whether there is any merit in these arguments; in order to do so it might well be necessary that evidence be led, and any event much more elaborate argument would be required. The critical point in relation to all of the possible arguments is that they do not properly raise objections to entries in the accounts with a view to bringing out the proper balance that is due to the various parties. They relate rather to the validity of an agreement to compromise the parties' claims: whether any such agreement has been reached, or whether an essential condition of such an agreement has been negated, or whether such an agreement was concluded under essential error. Arguments of that nature do not in my opinion form the proper subject matter of objections to accounts. They raise matters that are essentially extraneous to a proper accounting. In this connection, it should be recalled that accounts are designed to represent a pre-existing financial situation. They are a record rather than a document that gives rise to new rights and obligations. Objections to accounts should in my view relate to the pre-existing financial situation, rather than any new matters that may have arisen during the course of the action. An agreement to compromise claims may determine what the pre-existing financial situation was, and in that event it is obviously appropriate to incorporate its terms into the accounts. To the extent that there is any dispute as to whether the terms of a binding agreement have been properly incorporated into the accounts, it may be proper to raise that by means of the objections procedure; what is in issue there is the determination of the true balance that is due as among the parties. Where, however, there is a dispute as to whether any binding agreement was reached to determine the pre-existing financial position, or where there is a dispute as to what was actually agreed, that is a matter that is extraneous to the normal accounting process; it rather concerns the validity or interpretation of a contract concluded between the parties. A dispute of that nature is not in my opinion suitable for determination by means of objections to accounts because what is in issue is not how the pre-existing financial situation is reflected in the accounting but whether and in what terms the parties have reached agreement as to what the pre-existing position was. That seems to me to be a dispute of a totally different nature; in effect, it is an ordinary contractual dispute rather than a dispute as to the terms of an accounting.

[8] A specialty of the present case is that the draft accounts were lodged by the pursuer rather than the defenders; in that respect the ordinary procedure in an action of count, reckoning and payment was reversed. Nevertheless, I do not think that this affects the result. In spite of the reversal of order, the action has proceeded as if it were an action for count, reckoning and payment, with the lodging of accounts and the lodging of objections to those accounts. In my opinion the substance of the action, not its form, should be decisive, and the rules applicable to count, reckoning and payment should govern it. That means that the matters that can competently be raised by note of objections should be the same as in an action of accounting. The practical importance of restricting the scope of a note of objections is in my opinion well illustrated by the circumstances of the present case. The pensions group wish to challenge the basis on which an agreement to compromise the action may have been reached. That raises issues that are extraneous to the action, in that they relate to an agreement that does not form part of the basic subject matter of the action. Even in ordinary actions it is recognized that any dispute about an agreement to settle the action should be raised by means of a minute lodged in process which sets out the facts relating to the alleged settlement and the remedy sought by the party lodging the minute; the other party is then entitled to lodge answers setting out his contentions: see Dixon v Van de Weterfing, 17 March 2000 (OH), 2000 GWD 12-409; Lawrence v Knight, 1972 SC 26 (OH); and Parliament House Book, volume 2, paragraph 36.11.7. The advantage of such a procedure is that it enables the parties to identify the matters in dispute about the settlement plainly and quickly. In Dixon v Van de Weterfing the defender claimed that he had been induced to agree to settle the action by misrepresentation by the pursuer. Lord Bonomy ordered the pursuer within seven days to lodge a minute setting out the facts relating to the settlement and the remedy sought, and ordered the defender to lodge answers within seven days thereafter. He stated that it might be possible to determine the matter at a subsequent hearing, but if not a debate or proof might be necessary. It seems to me that a procedure of that nature is essential if the nature of the dispute relating to the settlement is to be properly focused.

[9] For the foregoing reasons I will repel the objections to the accounts that have been lodged by the pensions group. I will, however, appoint the action to call by order, and at that stage I expect the pensions group to indicate whether they wish to lodge a minute setting out their position in relation to such compromise as may have been agreed in December 2007.

Objections by Mr Grossett
[10] The note of objections for Mr Grossett, in contrast to that for the pension group, relates to the terms of the draft dissolution accounts. First, it is contended that appendix IV of the draft accounts represents that Mr Grossett had received interest amounting to £7,932. In fact no such payment had been received by him. Secondly, it is stated that following the agreement reached in December 2007 Mr Grossett received payment of £190,000, and it was further agreed that his entitlement to payment of that sum was on the basis that £150,000 was attributable to capital, £5,000 to interest and £35,000 to judicial expenses. Notwithstanding that agreement, it is said by Mr Grossett that the draft accounts erroneously characterize the entire payment as capital. Thirdly, it is stated that both note 1 and appendix IV to the draft accounts include a figure of £123,409 as an allocation of profit to Mr Grossett, but he is unaware of the basis on which that figure has been calculated.

[11] In my opinion all the foregoing matters are properly the subject of objections to accounts. The first relates to the factual accuracy of an entry in the accounts; a payment is represented as having been made, but Mr Grossett contends that that is inaccurate because no such payment was made. That seems to me to go directly to determination of the true balance that is due to him. The second objection is different in that it relates to the terms of the agreement that was reached in December 2007. In this case, however, Mr Grossett does not contend that there was no binding agreement; instead, he accepts that a binding agreement was concluded but submits that one of its terms, breaking down the sum of £190,000 payable to him, was not properly represented in the draft dissolution accounts.

[12] For the foregoing reasons I will not hold Mr Grossett's note of objections to be irrelevant. His counsel accepted that in determining the validity of these objections the underlying facts are crucial, and that proof might be required if no agreement could be reached between the parties. It seems to me that the matters referred to in Mr Grossett's objections can easily be ascertained by an examination of the underlying documents, and I would hope that agreement can be reached among the parties. As I indicated, I will have the action put out by order, and at that stage I hope that the parties will be able to indicate whether agreement has been reached on Mr Grossett's objections.