(FIRST) STEVEN WORBEY AND (SECOND) KEVIN FARRELL AGAINST (FIRST) SHARON CAMPELL; (SECOND) WAPO Y WAPA LIMITED; AND (THIRD) MATTHEW CHADWICK, AS TRUSTEE IN BANKRUPTCY OF STEVEN ELLIOTT
OUTER HOUSE, COURT OF SESSION
[2016] CSOH 148
CA200/15
OPINION OF LORD TYRE
In the cause
(FIRST) STEVEN WORBEY and (SECOND) KEVIN FARRELL
Pursuers
against
(FIRST) SHARON LAUGHLAND CAMPBELL; (SECOND) WAPO Y WAPA LIMITED; AND (THIRD) MATTHEW CHADWICK, as Trustee in Bankruptcy of STEVEN ELLIOTT
Defenders
Pursuer: A Smith QC, Markie; Clyde & Co
First and Second Defenders: R Dunlop QC, Tariq; Cloch Solicitors
Third Defender: No appearence
14 October 2016
Introduction
[1] In this action the pursuers seek certain declarators and other orders which, if granted, would entitle them to shares of the profits generated by two gay social network applications (apps) called Wapo and Wapa. It is unnecessary for the purposes of the present opinion to explain the circumstances in which these particular orders are sought, or why the action is raised against these defenders. The proof before answer which I heard was restricted to the following issues:
(a) Was there at any time a partnership, as averred by the pursuers on record?
(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 it at any time acquired by Bender Social Networking Limited (“BNSL”) and, if so, how was it acquired from the partnership?
[2] The partnership referred to in paragraph (a) above is averred by the pursuers (Mr Worbey and Mr Farrell) to have subsisted between themselves and Steven Elliott (Mr Elliott), with the objects of development, promotion, preparation, marketing and exploitation of gay dating apps known as Bender and Brenda, for purposes of profit. Such a partnership is said by the pursuers to have been formed not later than 17 October 2009, and to have subsisted until its dissolution on the bankruptcy of Mr Elliott on 29 January 2015. The defenders deny that any such partnership ever existed.
Creation of the parties’ business relationship
[3] Mr Worbey and Mr Farrell are professional concert pianists and entertainers who live in Edinburgh together with a friend, Mr Scott Barron. In about 2007 all three became friendly with Mr Elliott, who was at that time living in Clydebank. Mr Elliott had a keen interest in computing and also in music. Although Messrs Worbey and Farrell spent a considerable amount of time away from home performing on cruise ships and elsewhere, the friendship was maintained and social meetings took place whenever possible.
[4] By 2009 Mr Elliott had moved to Brighton and was working part-time from home as a web developer. In about July 2009 Mr Elliott visited Messrs Worbey, Farrell and Barron in Edinburgh. There was some general discussion during his visit about the creation of a gay dating app to rival – and improve upon – others then in the market. Messrs Worbey and Farrell 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.
[5] In October 2009, Messrs Worbey and Farrell were working in Vienna. Mr Elliott went to visit them there for three or four days. One evening, during a discussion among the three in a bar after a performance by Messrs Worbey and Farrell, the topic re-emerged of development of a gay dating app, and in particular of a location-based app. It is a matter of agreement that the discussion in the bar was animated and that the prospect was regarded as exciting. There is, however, dispute as to the context of the discussion. Mr Elliott sought in his witness statement and oral evidence to play down its significance, describing it as a “pie in the sky” conversation at a time when all concerned had had a lot to drink. Mr Worbey and Mr Farrell denied having had more than one or two alcoholic drinks; as a matter of invariable practice they never got drunk when they had to perform the following evening. I accept their evidence on this and I find that the conversation that evening had a serious purpose, as reflected in the email sent by Mr Elliott on 17 October 2009 to which I will turn shortly.
[6] 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 a version of the app for lesbian users 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 proximity, and the question whether there should be a membership scheme whereby charges could be made for use of the app. Mr Elliott expressed a willingness to spend time ascertaining whether he could learn how to create such an app. Mr Worbey and Mr Farrell agreed to fund Mr Elliott’s acquisition of a laptop computer to enable him to begin to learn how to create the app.
[7] On 15 October 2009 (at 18.59), Mr Elliott emailed Messrs Worbey, Farrell and Barron observing:
“Since the four of us are almost never in the same country as each other, we need to have a good way 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…”
Mr Elliott suggested Google Wave as an appropriate means of communication. There was no direct evidence as to whether this email was sent before or after the Vienna discussion, but having regard to the dates and times of this and the following emails that I will mention, it seems to me that it must have been sent after the Vienna discussion and presumably after Mr Elliott’s return home. Mr Elliott followed it up the next day (16 October, at 12.45 pm) with an email to Mr Worbey containing 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).”
[8] On 17 October 2009 at 00.37, Mr Elliott sent a lengthy email to Mr Worbey, Mr Farrell and Mr Barron. In view of the importance placed by the pursuers upon the Vienna discussion, it is necessary to set out much of this email in full. Under a subject heading “MacBook - Bought. Actions Needed. Recap for Scott”, 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 Scott 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 Scott.
The bad news: Ignore what I was saying yesterday about Google Wave. Apparently you won’t receive an invite immediately so we will need to communicate old fashioned email style in the meantime. But keep an eye on your inboxes for the invitation, and sign up as soon as it arrives.
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 Scott 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.
------------------------------------------------------------------
Ok. I'm pretty busy this weekend Scott 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.
1….
[Mr Elliott described a number of “key concepts”, which I need not 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”
[9] It was not suggested by anyone that this email was not an accurate reflection of the discussion in Vienna. I accordingly find that in so far as the email bears to record matters discussed and/or agreed in Vienna, it does so accurately.
[10] Mr Elliott sent a further email in the early hours of 17 October 2009, this time to Mr Barron alone, asking:
“I have a feeling you are going to know more about the legalities of things than me. What do you know about copyright? I think certain features of our app could be killer features, and if we could copyright them it would help prevent any rivals muscling in afterwards.”
Mr Barron’s involvement
[11] It is convenient to address at this stage the evidence regarding the extent of Mr Barron’s involvement in the Bender project. The point arises because it is a part of the defenders’ submission that there could have been no partnership when there was uncertainty as to the identity of the partners thereof. On the face of it, Mr Elliott’s emails of 17 October 2009 proceeded upon an assumption that Mr Barron would be a participant in the project and would be entitled to a share of the “49%” to be divided among Messrs Worbey, Farrell and Barron. Mr Elliott continued, until about the beginning of 2011, to address many (though not all) of his emails to Messrs, Worbey, Farrell and Barron, or at least to copy Mr Barron into emails addressed to Mr Worbey. It seems clear from the correspondence that Mr Elliott was keen for Mr Barron to participate; this may have been because he perceived that Mr Barron possessed a higher level of IT knowledge than either Mr Worbey or Mr Farrell.
[12] Mr Barron’s evidence, however, was that he was not at any time interested in participating, financially or otherwise, in the development and exploitation of the app. He acknowledged that he had received a number of emails from Mr Elliott, at the outset of the project and again towards the end of 2010, but he had not paid much attention to them because he had no intention of becoming involved. At the outset he was doubtful that anything would come of it, and latterly he came to distrust Mr Elliott’s motives for seeking money from Messrs Worbey and Farrell. His active participation had been limited to “rating” photographs uploaded by users of the app (according to their sexual content), which he had done from time to time to help out Messrs Worbey and Farrell when they were busy working away from home. He accepted that he had not, prior to the end of December 2010, stated explicitly to Mr Elliott that he did not wish to participate, and that with hindsight he had waited too long before saying no. Mr Farrell, for his part, was clear that he was aware at all times that Mr Barron did not wish to participate. Mr Worbey’s evidence was that at the time of the 17 October 2009 email he and Mr Farrell had thought that Mr Barron might wish to participate in the project; he too was clear, however, that Mr Barron had not in fact indicated that he wished to do so.
[13] Assessing the evidence as a whole, I am satisfied that Mr Barron did not at any time wish to participate financially in the Bender project; nor did he convey to any of the others the impression that he did. He was not, of course, present in Vienna when the details of the project were discussed and to some extent agreed. No doubt he took part in conversations at home with Mr Worbey and Mr Farrell about Bender, but his active involvement in the project consisted of assisting with the rating of photographs and, perhaps, indirectly subsidising such financial contributions as Messrs Worbey and Farrell were able to make. As narrated below, a suggestion was made towards the end of 2010 that Mr Barron might join Messrs Worbey and Farrell in making regular financial contributions to the project, but there is no indication that that suggestion was made or in any way encouraged by Mr Barron himself. Any uncertainty during the period between October 2009 and December 2010 as to the nature and extent of Mr Barron’s participation seems to have subsisted largely in the mind of Mr Elliott. I do not regard that uncertainty as a material consideration in reaching a view as to whether, as the pursuers, assert, a partnership was formed between Messrs Worbey, Farrell and Elliott at or about the time of the Vienna discussion.
The pursuers’ contribution to development of the app
[14] It was, as I understood it, common ground between the parties that in determining whether a partnership subsisted between Mr Worbey, Mr Farrell and Mr Elliott, the court should focus its attention upon events at or about the time of the Vienna discussion. I do not therefore propose to set out in detail the subsequent voluminous email correspondence among the parties. It is, however, of relevance to identify what the parties respectively considered to be the commitment of Mr Worbey and Mr Farrell to the project and also what they in fact did by way of contribution to the development of the app, prior to severance of relations by Mr Elliott in May 2011.
Financial contribution
[15] In his email of 17 October 2009, Mr Elliott described the role of Messrs Worbey and Farrell (and Mr Barron) as “a mixture of investors/marketing gurus etc”. Mr Worbey and Mr Farrell agreed in their evidence to the court that this was a reasonable description. Both, however, were adamant that 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 had not and could not have agreed to such an arrangement; they were not rich, and as entertainers their income flow 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, and 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, and which they regarded as an investment.
[16] Mr Elliott’s position was that the pursuers had agreed to cover all of the costs of development and exploitation of the app until it reached a stage when it could fund itself, and that he, Mr Elliott, 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 may be summarised as follows. 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. For some months thereafter it appears that Mr Elliott did not incur any significant expenditure on development of the app and made no requests for funding. In February 2010, he invited 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 and 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”. In March 2010, Mr Elliott purchased an iPod Touch for £125 and sought and obtained reimbursement from the pursuers. 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 is a good figure for us assuming it's not all in one go. Until October it'll be in smaller amounts and increase from then on.” At around this time the pursuers expended around £300 on the cost of a trade mark application for Bender.
[18] During the next few months, Mr Elliott made a number of requests to the pursuers for money. Their response was that they were struggling financially, but they made contributions as and when they could, mainly of amounts of around £40 or £50. On 26 October 2010, Mr Worbey explained that they were unable to give Mr Elliott anything, but promised that “the three of us” (ie Messrs Worbey, Farrell and Barron) 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.
[19] 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. On 14 December, Mr Elliott emailed the business plan to Mr Worbey. There are issues about the receipt and distribution of this business plan to which I return below. Mr Elliott’s plan included a number of notable features with regard to the ownership and financing of the project:
- It envisaged the registration of a company called Bender Social Networking Limited. 80% of the shares in the company would be held by Mr Elliott; the remaining 20% would be divided among Messrs Worbey, Farrell and Barron.
- Mr Elliott would use his savings to promote Bender over the next year and buy any equipment needed.
- When the app began to earn money, approximately 40% of income would be reinvested in promotional and advertising activities.
- Messrs Worbey, Farrell and Elliott would invest £250 per month to cover running costs for the period, expected to be about a year, until sufficient income came in from advertising to cover costs. The money would be paid by a regular direct debit.
[20] Mr Worbey’s reply on 16 December 2010 (copied to Messrs Farrell and Barron) is also notable. He confirmed that “We’ve read the business plan a few times and it’s 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, Scott 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 reply, Mr Elliott proposed £200 per month if only the pursuers were involved or £250 if Mr Barron was also in, and emphasised the need for a definite answer from Mr Barron. As previously noted, Mr Barron confirmed shortly afterwards that he did not wish to participate.
[21] The pursuers made payments of £200 to Mr Elliott in January, February and March 2011. 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 become 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 that “…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”. On 1 April 2011, Mr Worbey replied agreeing that “it would be easier for all if we went with the royalties option”. He inquired whether the royalties would be from gross or net profits; Mr Elliott confirmed that they would be from net profits.
[22] On 8 April 2011, Mr Elliott emailed Mr Worbey noting that he had not received £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.”
Non-financial contributions
[23] The non-financial contributions made by the pursuers, in response to requests made by Mr Elliott, to the development and promotion of the Bender app may be summarised as follows:
(i) reviewing and rating photographs submitted by app users;
(ii) submitting the application for registration of a trade mark;
(iii) (in the case of Mr Worbey) receiving instructions on 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;
(iv) testing new versions of the app;
(v) being accorded the ability 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
[24] 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. However, on 9 May 2011, he sent the following letter (incorrectly dated 9 May 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 fulfill 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 indicia of partnership
[25] Partnership is “the relation which subsists between persons carrying on a business in common with a view of profit” (Partnership Act 1890, section 1(1)). There is no further prescriptive definition. The Act goes on to state a number of rules, some of which are couched in negative terms, to which regard must be had in determining whether a partnership does or does not exist. The position is, however, as stated by Lord Coulsfield in Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd 1996 SLT 186 at page 191:
“There is no simple or single test which can be applied in every case so as to establish or negative the existence of a partnership. All the relevant features of the parties' relationship must be examined and a view reached on the basis of all such features”.
Certain features of a business relationship have come to be recognised as the normal incidents of partnership. However, as the authors of Lindley & Banks, Partnership, warn (19th ed, 2010, at paragraph 2-13), there is a danger that normal incidents or characteristics of partnership are wrongly perceived as prerequisites to the existence of the relationship. Care must be taken to avoid distorting the application of section 1(1) above.
[26] Limited guidance relevant to the present case may 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 any profits from the use thereof;
- Sharing of gross returns does not of itself create a partnership;
- Receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner, but such receipt, varying with the profits, does not of itself make him a partner in the business.
Certain other provisions of the Act are also of importance. Section 5 provides that 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 6 states that an act of a partner done in any manner showing an intention to bind the firm is binding on it and on the other partners. Section 9, as applied to Scotland, provides that 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.
[27] In Lumsden v Buchanan (1864) 2M 695, a pre-Act case, Lord Justice-Clerk Inglis observed (page 711) that:
“…of the essential conditions of the contract of partnership none are more important than these two: (1) that every partner shall be entitled to a share of the profit, and liable to a share of the losses in proportion to the amount of his interest in the concern; and, (2), that the partners shall mutually relieve each other of all the debts and engagements of the company, so as to equalise and distribute liabilities and losses.”
To similar effect, in IRC v Williamson (1928) 14 TC 335, Lord President Clyde observed at 340:
“…You do not constitute or create or prove a partnership by saying that there is one. The only proof that a partnership exists is proof of the relations of agency and of community in 1osses and profits and of the sharing in one form or another of the capital of the concern; the only proof of a partnership consists in proof of these things.”
This passage was cited and applied by Lord President Emslie in Alexander Bulloch & Co v IRC [1976] STC 514 at 519. These observations must be seen in their context: both Williamson and Alexander Bulloch were tax cases in which it was contended (unsuccessfully) that family members were partners in business with their parents. I note also that in Williamson, Lord Clyde was of the view that proof of the foregoing matters could be supplied “by what in fact the persons alleging themselves to be partners have done during the currency of the alleged partnership”.
[28] In Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd (above), Lord Coulsfield identified a number of features to which attention should be paid. In addition to those stated in section 2 of the Act (above), he noted at page 192 the following features potentially indicative of partnership:
- An agreement to share losses;
- Common capital between the alleged partners;
- An element of delectus personae in the membership of the partnership.
Lord Coulsfield derived assistance from the formulation by Lord President Clyde in Williamson, and concluded (at page 195) that although the absence of one or even more than one of Lord Clyde’s key elements might be reconcilable with the existence of a partnership, the absence of all of them was not. Finally, in Pine Energy (Consultants) Ltd v Talisman Energy (UK) Ltd [2008] CSOH 10, Lord Glennie dismissed an action concluding for declarator that the parties were in partnership, observing that:
“…on the pursuers' own averments there was no agreement on two elements which were, and were clearly regarded by the parties as, critical. These were: (a) what, if any, capital contribution the pursuers would be required to make; and (b) what percentage profit share the pursuers would be entitled to.”
[29] I was referred to a number of English authorities which I need not rehearse as they do not appear to me to add anything of substance to the observations in the Scottish cases cited above.
Was there a partnership among Messrs Worbey, Farrell and Elliott?
[30] I am satisfied that an agreement of a business nature was envisaged by Messrs Worbey, Farrell and Elliott during the evening in Vienna. The terms of Mr Elliott’s emails and the subsequent actings of the parties make clear, in my view, that 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. As the Act makes clear, there are other possible analyses. Content has to be given to the words “carrying on a business in common” in section 1(1). As it is put in Lindley & Banks at paragraph 2-06, this 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”. (Emphasis in original.)
[31] I bear in mind the strictures in the authorities against elevating incidents of partnership into spurious prerequisites for the existence of a partnership. The problem for the pursuers in the present case, however, is that beyond the initial proposal of a 51/49 split, there was no evidence that any of the key incidents of a partnership relationship were a matter of express or even implied agreement. In particular,
(i) There was no evidence that Messrs Worbey and Farrell assumed any obligations whatsoever with regard to liabilities or, a fortiori, trading losses. Both were adamant that they were under no obligation to contribute anything by way of investment beyond that which they felt able to send to Mr Elliott from time to time. Mr Farrell saw this as a short-term arrangement until advertising revenues began to flow in. Neither was willing to, or regarded himself as obliged to, contribute to Mr Elliott’s living expenses; looked at in another way, this equates to a refusal to accept any obligation to contribute to losses during the period when the business was at an embryonic stage.
(ii) There was no evidence of a relationship of agency. As the pursuers agreed in the course of their evidence, none of the three was an agent of the others. In practical terms, Mr Elliott had no authority to incur expenditure on development of the app, and when he did so he used funds of his own. There was equally no suggestion that Messrs Worbey and Farrell had any authority to commit the three to anything at all, financially or otherwise.
(iii) With regard to the sharing of capital, I am inclined to read the references in Mr Elliott’s email to 51% and 49% as references to capital share; I do so because of the context, which is the hypothetical future realisation by the others of their interest in a successful business. It appears therefore that the parties did contemplate a capital sharing, but they did so in a way that is equally, if not more, consistent with exploitation of common property. The pursuers’ expectation was not a return of capital contributed (because nothing by way of capital other than, perhaps, the second-hand MacBook was in fact contributed by any party), but rather a return on capital, consisting of a share of accumulated future trading profits. Moreover, any weight placed on these references as demonstrating agreement on one of the key features of partnership would lead the pursuers into difficulties regarding another feature, namely an apparent absence of delectus personae if their shares were regarded as realisable at some future time.
[32] Nor, at this stage of the parties’ discussions, does there appear to have been any agreement, express or implied, as to whether the pursuers’ entitlement was to be to a share of gross or of net profits. In so far as the word “investors” suggests anything, it might suggest an entitlement to a share of gross returns, although there was no evidence that that was how any of the parties saw the matter at the time when the business relationship was formed. Mr Elliott’s confirmation that he had in mind a share of net profits came much later, shortly before he sent the letter which bore to terminate the relationship.
[33] As Lord Clyde observed in Williamson, 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. In my opinion, the parties’ actings do not provide such proof. As already noted, Mr Worbey and Mr Farrell proceeded after October 2009 on the basis, maintained at the proof hearing, 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 do not suggest that he regarded Messrs Worbey and Farrell as (yet) 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”.
[34] Mr Elliot’s concern culminated in the preparation by him of the business plan which he sent to Mr Worbey on 14 December 2010. As narrated earlier, Mr Worbey’s subsequent emails bear to show that the plan was received, discussed with Mr Farrell and Mr Barron, and generally approved by all concerned. In his evidence to the court, Mr Farrell was adamant that he was not aware at that time that a business plan had been sent by Mr Elliott, and that he did not even see it until long afterwards when he was shown it in his solicitor’s office. Mr Farrell’s credibility was attacked in this regard. His evidence was, however, supported by Mr Worbey who stated that the business plan was not in fact shown to or discussed with Mr Farrell or Mr Barron. For his part, Mr Barron did not remember receiving Mr Worbey’s email of 16 December 2010 to Mr Elliott (see paragraph 20 above). The terms of Mr Worbey’s email are not reconcilable with the oral evidence of Messrs Worbey and Farrell. I am inclined to regard the oral evidence as more accurate. It was clear from the evidence of both Mr Worbey and Mr Farrell that by the end of 2010 Mr Farrell had concerns about Mr Elliott’s future intentions, and that Mr Worbey was attempting to manage the relationship between them. For that reason he did not always pass information received from Mr Elliott on to Mr Farrell, or at least not immediately. There were aspects of Mr Elliott’s business plan that Mr Worbey knew would be very unwelcome to Mr Farrell: notably, the new proposal of an 80/20 split in ownership of Bender Social Networking Limited. In these circumstances, it is not difficult to understand why Mr Worbey might not have done anything to encourage Mr Farrell to read the business plan in detail, while misrepresenting to Mr Elliott that he had done so.
[35] There is another aspect to Mr Worbey’s reluctance to draw Mr Farrell’s attention to the business plan which is more directly relevant to the question of proof of the existence of a partnership. It was submitted on behalf of the defenders that it was not credible that such an eagerly-awaited document was not discussed by Messrs Worbey and Farrell as soon as it arrived. Again I do not find this difficult to explain. My clear impression is that the importance to the pursuers of the Bender project generally, at the time when Mr Elliott sent the plan, is now being exaggerated. The pursuers had a busy performing schedule and it would have been surprising if their attention had not focused principally on their own careers. They were preparing at that time to travel to Aruba for a professional engagement. It is apparent to me that neither receipt nor discussion of the business plan was given a high degree of priority by either of them. Although I find this entirely understandable, it does nothing to assist the pursuers in establishing that they were at that time “carrying on a business in common” with Mr Elliott.
[36] Senior counsel for the pursuer sought to derive support from the judgment of Lloyd J in Medcalf v Mardell & Ors (21 May 1998, unreported). The plaintiff in this case claimed entitlement to a one‑third share of the profits of the television game show “Big Break”, on the ground that the idea for the show had been devised and developed by himself and two of the defendants while carrying on business together in partnership. Lloyd J found in favour of the plaintiff, stating (page 34):
“I accept that by the 29th May 1987, and continuing thereafter, the three of them were carrying on business in common with a view of profit. It was admittedly an embryonic business which did not involve anything much in the way of dealings with third parties as yet, except the hiring of the King's Cross Snooker Club, but it was with a view to profit and by way of business. I accept that all three were in it together, and that each of them understood that.
This is not just a question of joint ownership of an asset, as [counsel for the first defendant] submitted. It was a joint collaboration. It was a dynamic process with a view to developing the idea of a snooker-based television quiz game show and to profit from it by sale to television and, indeed, perhaps otherwise.
It is true to say that no attention was given to the question of expenses or possible losses, but I do not find that in the least surprising. In fact significant expense or losses were most unlikely to be incurred. Implicitly the three of them would share net profits or, for that matter if it turned out badly, net losses equally.”
It was submitted that there were similarities between that case and the present one: an informal and unexecuted agreement was sufficient; the fact that there was no clear formulation of the method of calculation of profits was not fatal to the existence of a partnership; nor was the fact that profits would only arise much later; the fact that there was no trading for many years did not mean that there could not be a partnership; even when it was unclear who the partners were, this did not preclude a finding of partnership. I accept that some of those similarities are present here. I accept in particular that a partnership may come into existence long before trading with third parties – and hence production of profits – has commenced, provided that the persons concerned have actually embarked on the activity in question (Khan v Miah [2000] 1 WLR 2123, Lord Millett at 2127). There are, however, material differences. In the Medcalf case, the three individuals acquired mutual rights and undertook mutual obligations which were clearly agreed, namely to contribute ideas already formulated and to work together on the development and promotion of those ideas. In contrast, there was no express or implicit agreement in the present case as to, for example, what were the parties’ respective obligations, or how any losses would be shared, despite the fact that there was scope for incurring losses. None of the parties in Medcalf could be described as an “investor”. I am not persuaded that any of the similarities between the two cases should lead me to the conclusion that a partnership came into existence in the present case.
Conclusion
[37] Having regard to all of the relevant features of the parties’ relationship, I hold that 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 app, either immediately after the meeting in Vienna in October 2009 or at any subsequent time. That being so, issue (a) for determination (see paragraph 1) falls to be answered in the negative, and the questions in issue (b) do not arise for determination. In relation to these I will say only that if I had decided that a partnership existed among Messrs Worbey, Farrell and Elliott, I would have held that it was a partnership at will terminated by Mr Elliott’s letter of 9 May 2011.
[38] That is sufficient to dispose of the issues to which the preliminary proof was limited. It is not strictly necessary for me to express an opinion on the proper characterisation of the parties’ business relationship but it may be of assistance if I do so briefly. In Mr Elliott’s email of 17 October 2009, the pursuers’ role was described as “investors/marketing gurus etc”. In my view the evidence supports that characterisation. In essence, the nature of their interest was to receive a return from an item of property, namely the app in its various formats. In consideration of such a return, they were to make contributions of a financial nature and also contributions of a non-financial nature (such as advice on marketing, and rating photographs) which would enhance the value of the property. When, eventually, in March 2011 the pursuers were offered a choice between an equity share in the proposed company and an entitlement to royalties, they chose the latter. That was entirely consistent with the status of investors as opposed to members of a partnership.
[39] I also find, however, 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, Lord Hodge at paragraph 29). Contracts are not, however, to be lightly implied, and 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, Bingham LJ at 1202). In the present case I am of the view 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 pursuer’s 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 agreement by all concerned 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 does not in my view create any inference that the stage of binding contractual relations had been reached. Nor are references in the email correspondence to an “agreement” inconsistent with a common intention to enter into contractual relations once the terms thereof had been finalised.
[40] In summary, I would characterise the parties’ business relationship 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.
Disposal
[41] I shall put the case out by order to hear submissions on the order that falls to be pronounced in the light of my decision. Questions of expenses are reserved.