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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Pickard & Anor (t/a Jacksons) v Orpwood [2002] EWCA Civ 1968 (06 December 2002) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/1968.html Cite as: [2002] EWCA Civ 1968

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IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BRIGHTON COUNTY COURT
(HIS HONOUR JUDGE KENNEDY)

		Royal Courts of Justice Strand London, WC2
		6 December 2002

1. LORD JUSTICE LAWS: This is a defendant's appeal with permission granted by Lord Justice Tuckey on 5 September 2002 against two orders made by His Honour Judge Kennedy in Brighton County Court on 7 May 2002 after he had given judgment in the action following a trial which had taken place over four days as long ago as October 2001. In addition to making provisions for the costs, dismissing the appellant's counterclaim and refusing the appellant's application for permission to appeal, the judge made in all ten substantive orders. So it will be apparent that the grant of permission to appeal by Lord Justice Tuckey was partial only.
2. The case involved a partnership dispute. The story begins with a partnership agreement entered into by way of a deed dated 1st December 1982 between the two claimants. The partnership business was that of estate agents and surveyors and was carried on in Hove. Throughout, I think, the partnership name has been Jacksons. By late 1986 Jacksons was operating in three offices: Hove, Steyning (which seems to have been considered a satellite of the Hove office) and Worthing. By that time it seems that there were four partners practising at Worthing: the claimants, A Beaumont and J Beaumont. The appellant came on the scene at about this time in late 1986. He introduced cash and assets to the tune of £20,000. He was to protest in his pleadings in these proceedings that the terms of the partnership into which he undoubtedly entered with the respondents (the claimants) were not those of their earlier agreement of 1 December 1982. But at least by the time when an agreed list of issues was formulated after the evidence had been given in the case, and as appears from counsel's closing submissions, it was common ground that the appellant had entered into the terms of the 1982 deed.
3. At length the appellant retired from the business on 31 July 1992. The litigation concerns the terms of his severance from the partnership and the implementation or failure of implementation of those terms. The respondents claimed in the proceedings an account of money said to be due to them from the appellant. By Clause 19 of the 1982 deed the provisions contained in the schedule applied whenever any partner retired. These provisions set in place arrangements by which the outgoing partner should be bought out by the continuing partner or, by 1992, partners. The purchase price of the outgoing partner's share is defined by paragraph 4 of the schedule as follows:

"4 The purchase price shall be a sum equal to the aggregate of

(1) The amount standing to the credit of the outgoing partner's capital account in the balance sheet prepared as at the succession date"

I interpolate, the succession date for all effective purposes was the date of retirement, 31 July 1992.

"(2) An amount equal to the same proportion of the value of the goodwill of the partnership as the proportion of the net profits of the partnership to which the outgoing partner was entitled immediately prior to the succession date."

Paragraph 5 of the schedule provides so far as relevant:

"5 (1) For the purpose of the preceding paragraph the value of such goodwill shall be calculated as follows:

(a) if the succession date shall fall within the first three completed financial years of the partnership the value shall be the amount of the average annual net profit of the partnership in the three financial years or since the beginning of the partnership whichever is the shorter period

(b) in the event that the succession date shall fall after the end of the third completed financial year of the partnership but prior to completion of the sixth financial year of the partnership the value shall be twice the amount of the average annual net profits of the partnership in the three completed financial years of the partnership next preceding the succession date."

I interpolate, in the event it was held that paragraph 5 (1) (b) applied in the appellant's case.

4. I go to paragraph 5 (2) which is the critical paragraph for the purposes of the issue upon which Lord Justice Tuckey gave permission:

"In this paragraph the annual net profits of the partnership means the annual net revenue profits of the partnership as shown in its profit and loss account after taking into account all charges provisions and credits inclusive of those made for depreciation of assets but exclusive of those made in respect of income tax."

5. The issue upon which Lord Justice Tuckey gave permission to appeal involves events relating to the Worthing office. There were separate partnership deeds relating to Worthing dated 15 February 1988 and 11 August 1989 to which there were further parties in addition to the respondents and the appellant. I should say that by the time of trial - certainly by now - there is, I understand, no dispute but that the appellant's share in the Worthing business was to be treated as 30 per cent. What happened here was that the Worthing business consistently incurred losses while the Hove business consistently generated profits. In consequence the Hove practice habitually provided financial support for the Worthing practice. This was reflected in the balance sheet prepared for Hove's accounts in each of the years 31 July 1987 to 1990 under a heading "Loan to Worthing" as follows: 1987 £11,375, 1988 £24,966, 1989 £59,331, 1990 £72,567.
6. In cross-examination in the County Court the appellant agreed that these balance sheets showed the correct position. Moreover in a letter to the firm's bank of 11 April 1990 he said:

" ..... we would anticipate the profits from Hove to be more than adequate to cover the ongoing losses from the Worthing office."

In the next paragraph it says:

"As you are aware, unlike many estate agents having problems at the moment, we do have a substantial professional department, the profit from which alone covers all our present outgoings including the running costs of the Worthing office."

There is also a letter from the accountants to the three partners jointly, dated 25 March 1991, which has this sentence:

"A similar trading situation existed with regard to the Worthing business where at 31 July 1989 the Worthing business owed the Hove business £59,331 in respect of moneys loaned and expenses paid on its behalf."

So the fact that the Hove practice historically supported the Worthing practice by the advance of these loans is entirely plain on the evidence.

7. At length the Worthing practice - it may be no more than its premises - was sold to a third party in May 1991. However the Hove accounts to 31 July 1991 still showed an entry under current assets "Loan to Worthing", although now it was put at a nil value. It was recognised that the loans to the Worthing practice were irrecoverable. The Hove partners recognised this by way of debits in their 1991 capital accounts described as "share of loan to Worthing". We have the accounts in the trial bundle. It is not necessary for the purposes of the appeal to set out the figures. We have also seen the closing accounts of Worthing at May 1991. It is said for the respondents that there remained outstanding liabilities of the Worthing practice after 31 July 1991. They say that the Hove partners continued to pay them out and that unpaid liabilities of Worthing were taken over by the Hove partnership. The partners' respective capital accounts for the year ending 31 July 1992, in draft accounts prepared by Messrs Carpenter Box brought into account each partner's "share of loan to Worthing".
8. I come to explain the issue upon which Lord Justice Tuckey granted permission to appeal. Before the trial judge there was an agreed list of issues for his determination. I should read issues 2 and 3 (c):

"2 whether any sum in respect of the Worthing partnership should be debited to the defendant's capital account as at the date of his retirement from the partnership and if so, the principles on which such sum should be calculated;

3 in calculating the sum, if any, payable to the defendant in accordance with Clause 19 in the schedule to the deed;

.....

(c) whether in each of the relevant financial years there fall to be taken into account the losses of the business carried on at Worthing in calculating the 'annual net profits of the partnership' for the purpose of paragraph 5 of the schedule to the deed."

9. The minute of order shows that the judge's answer to question 2 was:

"As to issue 2, it is declared and ordered:

(1) that the partnership accounts to 31 July 1992 shall take into account the liabilities of the Worthing practice as part of the 'sundry creditors and accruals' and as 'share of loan to Worthing' as set out in the draft partnership accounts to 31 July 1992 which are set out in schedule 2 hereto;

(2) otherwise that the said draft partnership accounts shall stand as the final partnership account between the parties as of the defendant's retirement on 31 July 1992."

So far so good.

10. When it came to issue 3 (c) here is the judge's order, paragraph 7 of the minute of order:

"As to issue 3 (c), it is declared and ordered that the net losses of the Worthing practice shall be taken into account in calculating the average annual net profits of the partnership for the purposes of paragraph 5 (1) of the schedule to the partnership deed."

Paragraph 10 of the judge's order carries his conclusion on issue 3 (c) into effect and is as follows:

"Pursuant to paragraph 4 of the schedule to the partnership deed, the claimants shall pay to the defendant the sum of £7,658 together with interest thereon at the rate of 10% per annum from 31 July 1992 to date, in the total sum of [.....]"

there is a blank, assuming the interest had not been calculated -

"The claimants shall be at liberty to set off the sum mentioned in paragraph 9 above against the sum due under this paragraph."

11. Lord Justice Tuckey gave permission to appeal only in relation to the orders at paragraphs 7 and 10. Number 10 is really consequential on 7. Lord Justice Tuckey also gave permission to adduce two pieces of further evidence: a statement by an ex-partner of Jacksons, Mr Thorns, dated 22 July 2002, and a letter from the accountants Messrs Carpenter Box dated 30 July 2002. Both were to the broad effect that there was no merger, certainly no formal merger or joinder, of the Hove and Worthing partnerships.
12. For the purposes of issue 3 (c) which the judge dealt with by his order number 7, the provisions of clause 5 (2) of the schedule to the 1982 deed were critical. For convenience I read it again:

"In this paragraph the annual net profits of the partnership means the annual net revenue profits of the partnership as shown in its profit and loss account after taking into account all charges provisions and credits inclusive of those made for depreciation of assets but exclusive of those made in respect of income tax."

13. One turns to the profit and loss accounts of the Hove partnership for the years up to 1991 which are the years in question: these are in the trial bundle. None of them shows any losses of the Worthing practice as a constituent element at all. On the face of it the price of the appellant's retirement thus fell to be calculated in accordance with Clause 5 (2) of the schedule without regard to the Worthing losses. But the judge held otherwise. His reasoning to support that conclusion is to be found in paragraphs 33, 37, 51 to 53 and 59. In paragraph 33 he said:

"33 ..... Either Worthing remained throughout a separate partnership and business, in law and in fact, until it ceased to trade as such (whether formally dissolved or not); or it became a part of the trading in the partnership structure of Hove.

.....

37 Mr Orpwood's statement makes clear that by early 1991 he was thinking of going into a new partnership with a Mr Payne in Worthing. Although his case then was that his resignation took effect in July 1991, he now accepts it was a year later - the 'succession date'. Mr Orpwood's original case had been that he continued as a consultant for that last year. On the totality of the evidence, however, it seems to me unarguable but that, during that year, the still extant partnership as a fact 'took over' Worthing's losses and they became part of the whole partnership trading."

At paragraphs 51 to 53 it reads:

"51 The complaint that one might expect from Mr Orpwood, that the Worthing bank account was allowed to continue accruing overdraft interest to his disadvantage is perhaps implicit in Miss Williamson's submissions. He could have stopped it - in theory - at any time, provided he could pay his share of closing that account. I regard that line of thought as somewhat unreal.

52 At the end, the Worthing losses appear to have been carried in the account as a loan - now irrecoverable. Subject to the undoubted right of Mr Orpwood to check the figures, as to which I could if necessary hear argument, I do not believe he can now complain in principle of how that loss is dealt with in the proposed final accounts.

53 It is my view that the order proposed upon this issue by Miss Staddon at paragraph 29 of her submission is the just and equitable solution."

In fact, paragraph 29 of Miss Staddon's submission went to issue 2 in the list of issues. In paragraph 59 the judge said:

"Thirdly, the Worthing annual losses as a constituent of the annual net profits of the Hove partnership."

I interpolate, the judge here comes directly to deal with issue 3 (c). The paragraph continues:

"Although Miss Williamson does not deal with this issue as a separate part of her final submissions, her reservations to the Hove annual profit figures being adversely affected by the parallel Worthing loss figures, certainly up to the disposal of Worthing's assets in 1991 - are clear from what she said as a whole about the Worthing partnership ..... She asserts that the proper course arguably was for the Worthing partnership to have been formally wound up, presumably at some date in 1991. I feel that upon this issue I find Miss Staddon's argument wholly convincing. As remarked earlier, formal dissolution or no, it was essentially the bank's position that mattered, other creditors having seemingly been disposed of. It is all too clear that Hove 'took on' Worthing and no one suggests that its bank liability be settled at the time. It was eventually, on the evidence, taken on by the claimants under a separate new bank loan arrangement. It is far too late for Mr Orpwood to seek a retrospective theoretical re-analysis. The claimants are entitled to the declaration sought at paragraph 54 of Miss Staddon's submission."

That essentially was carried into effect by order number 7 in the minute of the orders made by the judge.

14. The respondents contend, in part in a respondent's notice and certainly in Miss Staddon's vigorous submissions made before us, that the practices at Hove and Worthing were factually incorporated together so that (this is how it is put in paragraph 5 of the respondent's notice) -

"'the partnership' for the purposes of paragraphs 4 and 5 of the schedule to the partnership deed meant Worthing as well as Hove ..... "

15. Miss Staddon has supported that proposition by reference to the written argument she placed before the judge, which he appears to have accepted in paragraph 59 of his judgment which I have read. The relevant paragraphs are 42 to 54; I will not read them all but will take only three. Paragraph 43 reads:

"43 After the sale of the Worthing practice and assets in May 1991 to a third party the remaining three Worthing partners (namely the claimants and the defendant), being by then the same individuals as the partners in the Hove partnership, brought and merged all the remaining aspects of the Worthing partnership (ie their rights and liabilities inter se and their liabilities qua Worthing partners to the remaining creditors of the Worthing partnership) into the Hove partnership.

.....

52 It is the claimants' submission therefore that after the sale of the Worthing practice and right up until the defendant's agreed retirement date of 31 July 1992 therefore the Worthing partnership and the Hove partnership were treated by the parties as one. No distinction needed to be made and none was made. There was only one operative partnership agreement between them, and that was the deed.

53 For these reasons, when it comes to ascertaining the historical business results of 'the partnership' in order to calculate any entitlement of the defendant on his retirement in July 1992, it is not only the performance of the Hove practice which needs to be considered but also that of the Worthing practice."

16. It is plain to me that the respondents' case required the judge to go behind the plain words of paragraph 5 (2) of the schedule to the deed. The parties made no provision for amending the 1982 deed or taking any measures for any kind of formal amalgamation between Worthing and Hove. Nevertheless, says Miss Staddon, there was a raft of evidence which was accepted by the judge that the effect of what happened was the same as if that had been done. She refers not only to the balance sheets which I have mentioned showing the partners bearing their share of the loans to Worthing; she refers also to the reference to sundry creditors and accounts in the 1992 balance sheet for Hove. The evidence was that these were unpaid Worthing debts. So the indication was that Hove had in effect brought in the debts owed by Worthing to become part of their own liabilities. She has referred further to certain documents relating to the banking position showing that the bank treated the Worthing debts as if they were Hove debts, and in 1993, at a date after the appellant's retirement, a single loan facility seems to have been negotiated with the bank to cover debts owed irrespective of whether their origin was Worthing or Hove.
17. It seems to me that - however strong the evidence that in 1991 and 1992 the partners were treating the effectively defunct Worthing partnership as being something which generated nothing but debts for the Hove partnership - it is a leap too far to suggest that for that reason the historic profit and loss trading accounts of Hove should be read as if they included some reference to losses incurred by Worthing. That involves a non sequitur.
18. Miss Staddon's closing submissions, in particular paragraph 43 which I have read, put it as high as it can be put. There is however no material there to support the conclusion that the historic profit and loss accounts to 1991 should be read as including what they did not include, namely losses sustained by the Worthing partnership.
19. In paragraph 53 of her argument which I have also read she appears to be putting forward a submission, not that there was an agreement in effect to modify the terms of paragraph 5 (2) of the schedule to the deed, but rather that the judge should come to a conclusion that the events which happened here should be treated as if they produced that result. That simply is not an available or a viable position for the claimants to take.
20. In my judgment the judge has confused a position in which the partners treated the debts of Worthing as being debts of Hove with something quite different, namely that a modified arrangement or agreement was in force in relation to the purchase price of the appellant's retirement. It seems to me that that is not legitimate. For those reasons I would allow this appeal.
21. If my Lord agrees there will be a question as to the money result of the appeal having been allowed. We will have to see what counsel have to submit about that.
22. LORD JUSTICE MANCE: I agree with my Lord's reasoning and conclusions.
Appeal allowed. A minute of order to be lodged with court