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|Judgments - Hurst v. Bryk and Others
HOUSE OF LORDS
Lord Browne-Wilkinson Lord Nicholls of Birkenhead Lord Hope of Craighead Lord Clyde Lord Millett
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
BRYK AND OTHERS
ON 30 MARCH 2000
I have read the speech prepared by my noble and learned friend Lord Millett. For the reasons which he gives I would dismiss the appeal.
LORD NICHOLLS OF BIRKENHEAD
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Millett. I agree that for the reasons he gives this appeal should be dismissed. I too prefer to keep open for another occasion the question whether a partnership can be automatically dissolved by an innocent partner or partners treating the other partner's or partners' breach as repudiatory. That question does not call for decision in the present case.
LORD HOPE OF CRAIGHEAD
I have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend Lord Millett. I agree with it, and for the reasons which he has given I too would dismiss the appeal.
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Millett and I agree, for the reasons which he gives, that the appeal should be dismissed.
It sometimes happens that a partnership is dissolved following a fundamental breach of the partnership agreement by one or more of the partners. The question in this appeal is whether the innocent partner or partners are thereby discharged from all further liability to contribute to the debts and obligations of the partnership, whether accrued at the date of dissolution or accruing thereafter.
Mr. Hurst has been in practice as a solicitor since 1975. In 1986 he joined a firm of solicitors by the name of Malkin Cullis & Sumption ("M.C.S.") as a salaried partner. The firm carried on practice from Inigo House, Covent Garden, London W.C.2 ("Inigo House"). On 1 June 1989, following a merger with five of the partners of another firm by the name of Janners, M.C.S. changed its name to Malkin Janners. On the same day Mr. Hurst joined the firm as an equity partner on the terms of a partnership deed dated 3 May 1989. There were 20 partners in all.
Shortly before this M.C.S. had taken a 20 year lease of additional premises at 15 King Street ("King Street") at an annual rent of £95,000. The terms of the lease had been negotiated towards the end of 1988, and the lease was taken in the names of four of the equity partners of M.C.S. as trustees for the firm. Mr. Hurst, who was not yet an equity partner, was not consulted on this transaction. Nothing, however, turns on this. Clause 3 of the partnership deed of 3 May 1989 (which replaced a clause in almost identical terms in the M.C.S. partnership deed) was in the following terms:
Clause 3.3 merely set out in terms what would be the legal position in the absence of express agreement. Malkin Janners was not the same firm as M.C.S. by a new name. It was a new partnership with new partners who included Mr. Hurst. It took over King Street as well as Inigo House and assumed liability for the rent of both properties. By becoming a partner in Malkin Janners Mr. Hurst acquired a beneficial interest in both leases and became jointly with his fellow partners liable for the rent.
By the Spring of 1990 relations between the partners had deteriorated to such an extent that several of them were actively considering giving notice of retirement with a view to moving elsewhere. At a partners' meeting in July 1990 all five former Janners partners indicated their intention to serve notices of retirement. During August all the remaining partners except one served such notices to take effect on 31 May 1991. Mr. Hurst was among those who served notice. Had these notices been allowed to take effect, the firm would have been dissolved on 31 May 1991.
It was clear that the firm had no future. By September most of the partners were in agreement that it would not be possible to continue the partnership until the following May. Steps were put in hand to bring about its earlier dissolution. Staff were given notice. On 4 October 1990 all Mr. Hurst's fellow partners entered into an agreement ("the dissolution agreement") to dissolve the partnership on 31 October 1990. Under the terms of the dissolution agreement five of the partners would form a new firm under the name Malkins with effect from 1 November 1990; Malkins would carry on practice from Inigo House; Malkin Janners would assign Inigo House to Malkins; and any continuing liabilities in respect of King Street would remain the responsibility of the partners of Malkin Janners.
Mr. Hurst was invited to sign the dissolution agreement but refused to do so. The judge (Carnwath J.) described his attitude as unrealistic. On 2 November 1990 Mr. Hurst informed his partners that he regarded their conduct in entering into the dissolution agreement as a repudiatory breach of the partnership agreement which he had had no alternative but to accept with effect from 31 October 1990. He had already accepted an offer to become a partner of D. J. Freeman, and he joined that firm on 5 November 1990. Other partners moved to other firms.
It is obvious that the partnership did not survive these events, and it is common ground that, if it was not dissolved with effect from 31 October 1990 (as Mr. Hurst alleges) by his acceptance of his partners' repudiatory breach of contract, it was dissolved with effect from that date by mutual consent.
A Steering Committee was formed to wind up the firm's affairs. Mr. Hurst attended occasionally and received some of the papers, though not all of them. The partners in Malkins duly took over Inigo House and assumed responsibility for the tenants' obligations under the lease. They paid no premium for the lease because it was considered to have no value. There had been a substantial fall in property values since the rent for King Street had been negotiated at the end of 1988, and it proved impossible to dispose of the property or to sublet it except at a rent considerably below the rent payable to the landlord. It has been sublet but remains undisposed of to this day. There is a continuing liability for rent.
In other respects the winding up of the affairs of Malkin Janners was completed without difficulty. An interim dissolution account was prepared by the firm's accountants. It contained no entries in relation to Inigo House or King Street. It has still not been possible to produce a final account because of the continuing liability in respect of King Street. The interim account showed a small sum slightly in excess of £4,000 to be due to the firm from Mr. Hurst.
Mr. Hurst began these proceedings against his former partners in 1992. His main object was to avoid the continuing liability under the King Street lease. To this end he alleged that the partnership had been dissolved by his acceptance of his partners' repudiatory breach of contract and sought a declaration that he was thereby discharged from any obligation to contribute to the liabilities of the firm as they stood at 31 October 1990 or as they accrued thereafter. In addition he asked for a general partnership account to be taken by the court. The defendants counterclaimed for payment by Mr. Hurst of his share of the partnership liabilities.
In 1993 the landlord of King Street brought proceedings for arrears of rent against the four partners in whose name the lease had been taken. They in turn brought third party proceedings for contribution against their former partners including Mr. Hurst. By his third party defence Mr. Hurst denied liability on the grounds (i) that any trust which might have been created by clause 3 of the partnership deed had come to an end on 31 October 1990; (ii) that the claimants' right to contribution was entirely dependent on clause 3.3 of the partnership deed; and (iii) that he was discharged from all obligations under the partnership deed with effect from 1 November 1990 by reason of his acceptance of his partners' repudiatory breach of contract.
Although the defendants denied that their conduct in entering into the dissolution agreement constituted a repudiatory breach of the partnership deed, the judge found that it did and his conclusion was unanimously upheld by the Court of Appeal. There has been no further appeal to your Lordships' House from this finding or from the underlying assumption in both courts below that it was this which brought about the dissolution of the partnership.
The judge exercised his discretion by refusing to order the taking of a general partnership account, and in this respect also the Court of Appeal unanimously upheld his decision. As the judge pointed out, it would be very unusual for the court to order a complete audit of the firm's accounts to be undertaken by an independent accountant. Where, as in the present case, detailed accounts had already been prepared by competent accountants, these would normally form the basis for any further accounts and inquiries. Any partner would have the right to surcharge and falsify the accounts, but the burden would be upon him to do so.
In the present case the only significant dispute concerned King Street and Inigo House. Mr. Hurst challenged the terms on which Inigo House had been transferred to Malkins, but it was incumbent upon him to show that the lease had a value which was not realised by the disposal. He failed to do so. The judge found that the lease was regarded as burdensome and its acquisition by Malkins was a matter of intense negotiation with the other partners. There was no evidence that any group of partners obtained any special advantage at the expense of the others. There were a number of groups with different interests and the arrangements with Malkins were the result of hard bargaining between them. Mr. Hurst adduced no valuation evidence, and the judge concluded that he would not be justified in ordering an account on the speculative chance that there might be some additional value in Inigo House, which had not been taken into account.
Mr. Hurst's main contention was that his partners' repudiatory breach of the partnership agreement discharged him from all further obligations under the partnership deed. These included his obligation to contribute to the liabilities of the partnership which had accrued prior to its dissolution as well as to those which continued to accrue thereafter. The judge rejected both contentions. He held that partnership liabilities which arose prior to dissolution remained liabilities of the partnership as a whole notwithstanding the repudiatory breach of contract and consequent dissolution. Mr. Hurst's responsibility for his share of those liabilities depended, not on the continuation of the partnership, but on the fact that he was a partner at the time they were incurred. The same principles, he reasoned, applied to the continuing liabilities accruing after dissolution which resulted from transactions entered into prior to dissolution. It made no difference that the partnership was brought to an end by repudiation rather than by agreement. Mr. Hurst was, therefore, liable to contribute to the rent due in respect of King Street accruing after as well as before the dissolution of the partnership. The judge dismissed the action and granted a declaration on the counterclaim that Mr. Hurst was liable to pay his share of the partnership liabilities, including continuing liabilities for rent. His decision was upheld by a majority of the Court of Appeal (Simon Brown and Peter Gibson L.JJ., though for different reasons). Hobhouse L.J. (now Lord Hobhouse of Woodborough) dissented.
Mr. Hurst now appeals to your Lordships' House. He has succeeded in settling the dispute with 11 of the defendants. Another is believed to be insolvent. Accordingly only seven of the original defendants remain as respondents to the present appeal. These include the 19th defendant, a Mr. Trepass, who has been separately represented before your Lordships.
Repudiatory breach of contract as an independent ground of dissolution
The consequences when a contract is brought to an end by the acceptance by one party to it of a repudiatory breach of contract by the other party are well established. They were clearly stated by Dixon J. in McDonald v. Dennys Lascelles Ltd. (1933) 48 C.L.R. 457 at 476-477, where he said:
This passage has been expressly approved by your Lordships' House: see Johnson v. Agnew  A.C. 367, 396 per Lord Wilberforce; and Bank of Boston Connecticut v. European Grain and Shipping Ltd.  A.C. 1056, 1098-1099 per Lord Brandon of Oakbrook.
The doctrine of accepted repudiation is of general application in the law of contract, and there is no reason why it should not apply to an agreement to enter into partnership or to the contractual obligations which the partners mutually undertake to observe after the partnership has come to an end. But I have considerable doubt that it can be employed to bring about the automatic dissolution of the partnership itself.
The use of the doctrine for this purpose would certainly be unhistorical. In its modern form it is of relatively recent origin. There appears to be no trace of it before Freeman v. Taylor (1831) 8 Bing. 124, and it was not fully understood until much later. Of course, it had long been recognised before then that the refusal or inability of one party to perform his part of the bargain should immediately excuse the other party from performing or preparing to perform his part. As Williston on Contracts, vol. 1, 3rd ed., pointed out, the reason why the plaintiff must ordinarily have performed his contract in order to recover is that the mutual performances in a bilateral contract are given in exchange for one another, and if the exchange fails on one side the other party may likewise decline to perform. Before the middle of the 19th century, however, the common law treated the innocent party as discharged from further performance, not because the other party had committed a breach of contract, but because he had failed to perform a condition precedent to the obligation of the innocent party. Even where what was relied on was a breach of contract, therefore, the critical question was whether the parties' contractual obligations were mutually interdependent or independent. The question whether there has been a mutual discharge of reciprocal obligations can arise only in a bilateral context.
Where one party was in breach of contract, the voluntary exercise by the innocent party of the right to refuse to perform his part of the bargain was usually described as "bringing the contract to an end" or "rescinding" it, with the result that he could not also claim damages for the breach. This fallacy was exposed by Bowen L.J. in Boston Deep Sea Fishing and Ice Co. (1888) 39 Ch. D. 339, 365 and by Holmes C.J. in Daley v. Peoples Building Association (1901) 178 Mass. 13. But it persisted until modern times, particularly in the Chancery Division: see Henty v. Schroder (1879) 12 Ch. D. 666 and the cases which followed it down to Barber v. Wolfe  Ch. 187 and Horsler v. Zorro  Ch. 302. It was not finally laid to rest until Heyman v. Darwins Ltd.  A.C. 356 and (in relation to sales of land) Johnson v. Agnew  A.C. 367. The failure to distinguish between discharge by breach and rescission ab initio has led many courts astray and continues to do so.
It is impossible to say whether the modern contractual doctrine of accepted repudiation might have infiltrated the law of partnership if partnership had been treated as merely a particular species of contract enforceable in the common law courts. Disputes between partners and the dissolution and winding up of partnerships, however, have always fallen within the jurisdiction of the Court of Chancery. This is because, while partnership is a consensual arrangement based on agreement, it is more than a simple contract (to use the expression of Dixon J. in McDonald v. Dennys Lascelles Ltd); it is a continuing personal as well as commercial relationship. Neither during the continuance of the relationship nor after its determination has any partner any cause of action at law to recover moneys due to him from his fellow partners. The amount owing to a partner by his fellow partners is recoverable only by the taking of an account in equity after the partnership has been dissolved: see Richardson v. Bank of England (1838) 4 My. & Cr. 165: Green v. Hertzog  1 W.L.R. 1309. Only the Court of Chancery was equipped with the machinery necessary to enable such an account to be taken, and the basis upon which the account was taken reflected equitable principles. These could be modified by agreement, but they did not find their source in contract.
The basic principles of partnership law are set out in the Partnership Act 1890 ("the Act"), which was drafted by Sir Frederick Pollock and is still in force today. It codified (though not exhaustively) the law of partnership and reflected the pre-existing principles of equity which had been developed by the Court of Chancery. These did not include the contractual doctrine of repudiation. It is noticeable that section 1 of the Act, which defines the concept of partnership makes no reference to contract. It defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit."
Given this history, it is not surprising to find that until recently there was no recorded case of the automatic dissolution of a partnership being brought about by the acceptance of a repudiatory breach of contract, and no indication that this is a ground of dissolution in the Partnership Act 1890 or (except to doubt it) in successive editions of Lindley on Partnership over a period of more than 100 years. Generations of Lord Chancellors in the 18th and 19th centuries would have failed to recognise the concept. Thereafter, if the judges of the Court of Chancery had recognised the concept at all, it is likely that they would have rejected the idea that the dissolution of a partnership at the instance of one partner, however wronged, and against the wishes of his fellow partners can be withdrawn from the discretion of the court and left to the unilateral decision of the innocent partner.
Repudiation as a ground of dissolution first saw the light of day in Hitchman v. Crouch Butler Savage Associates (1982) 80 L.S.Gaz. 550, where Harman J. treated as axiomatic the proposition that the doctrine of repudiatory breach applies to partnership agreements as it applies to other contracts. The question, however, is not whether the doctrine applies to the contract of partnership, but whether it operates to bring about the automatic dissolution of the partnership relationship.
This is much more doubtful. In the first place, the Act expressly states the circumstances in which a partnership is dissolved (expiry of a fixed term or termination of the adventure or undertaking, notice, bankruptcy or death of any partner, supervening illegality or order of the court). It makes no mention of repudiatory breach of contract. It is true that a partnership may also be dissolved by mutual agreement, and it may be objected that this is not mentioned either; but in fact it is catered for by section 19 taken in conjunction with section 32(a). This cannot be relied on to support the admission of an accepted repudiation as an automatic ground of dissolution. The theory that a repudiatory breach of contract is an offer to terminate the contract which can be accepted by the offeree, thereby bringing the contract to an end by mutual consent, is discredited. The contract is brought to an end by the exercise of a right conferred by law on the parties to the contract from the outset, not by virtue of a new agreement between them.
The admission of a new ground of dissolution which is not mentioned in the Act and which would not have been recognised by the Court of Chancery is far from axiomatic. But the supposed ground also sits uneasily with section 35(d) of the Act. This gives the court a discretionary power to decree a dissolution of a partnership when a partner, other than the partner suing,
It is difficult to envisage a case in which conduct of this description would not constitute a repudiatory breach of contract which the party suing could accept by bringing proceedings.
Even if this brought about the automatic dissolution of the partnership, it would not follow that paragraph (d) was altogether empty of content. It would not be needed where there are only two partners, but it would still be needed where there are more than two partners and there is at least one partner who is innocent of any wrongdoing and who does not accept the repudiation. It would also arguably be needed even in a case like the present where there are numerous partners who fall into only two camps, those who are alleged to have committed a repudiatory breach and those who claim to have accepted it. What is there to bring the contract to an end as between the parties who are in the same camp? It is noticeable that the Act expressly provides that the death or bankruptcy of any partner operates to dissolve the partnership as regards all the partners. The contractual doctrine applies to multiparty as well as to two party contracts, but it merely effects the mutual discharge of reciprocal obligations. It necessarily operates bilaterally as between each party in breach and each party accepting the breach as repudiatory by discharging them from their reciprocal obligations. It is difficult to see how it can operate to discharge the parties in the same camp, whether guilty or innocent, from the obligations they owe each other. This can only be achieved by agreement.
This would lead to a very odd distinction between those (few) cases where dissolution was automatic and those cases where it was not. To my mind, however, the strongest argument against admitting repudiatory breach as a further ground for the automatic dissolution of a partnership is that, wherever applicable, it would circumvent the discretionary power of the court under section 35. Even where the plaintiff establishes conduct on the part of his fellow partners which comes within section 35(d), the court is not bound to order a dissolution. This reflects equitable principles, but is in sharp contrast to the approach of the common law.
By entering into the relationship of partnership, the parties submit themselves to the jurisdiction of the court of equity and the general principles developed by that court in the exercise of its equitable jurisdiction in respect of partnerships. There is much to be said for the view that they thereby renounce their right by unilateral action to bring about the automatic dissolution of their relationship by acceptance of a repudiatory breach of the partnership contract, and instead submit the question to the discretion of the court. For a similar principle in a different contractual context see Johnson v. Agnew  A.C. 367, 399 per Lord Wilberforce.
The courts below, however, found that the dissolution of the partnership was brought about by the acceptance by Mr. Hurst of his partners' repudiatory breach of contract and not by mutual agreement. That finding, and the assumption on which it is based, have not been challenged before your Lordships. In these circumstances I am content to proceed on the basis of the same assumption while reserving for future consideration the question whether it is correct.
Consequences of dissolution
When a partnership is dissolved, its affairs must be wound up. This is the responsibility of the partners themselves. There is no provision for it to be undertaken by an office holder, though any of the parties can apply to the court for the appointment of a receiver if this is necessary to preserve the partnership assets.
To enable the partners to wind up the affairs of the partnership, section 38 of the Act provides that after the dissolution of the firm the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution as far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the date of dissolution, but not otherwise. Thus each of Mr. Hurst's fellow partners had authority to negotiate for the disposal of the partnership premises or to instruct the partnership accountants. They did not need his consent to dispose of Inigo House, though he had the right, as I have explained, to challenge the terms on which they disposed of it by surcharging the account. Likewise the firm's liability for the rent of King Street and its obligation to indemnify the persons (whether partners or not) in whose names the lease was vested will continue until the lease is disposed of and the affairs of the partnership are finally wound up.