The Court of Appeal has issued a warning for agents running a business as a partnership. Stuart Pemble gives the bad news
Key points
- A Court of Appeal decision highlights the risks faced by partners in sharing legal responsibility for another’s wrongdoing
- Property professionals in partnership could well consider alternative corporate structures for their business in order to avoid the risk
Sincerest apologies to anyone who read my legal note Agent provocateur (EG, 19 April 2014, p87). At the time, I had my suspicions that Green J’s judgment in Northampton Regional Livestock Centre Co Ltd v Cowling and another [2014] EWHC 30 (QB); [2014] PLSCS 30 might be considered (and possibly overturned) by the Court of Appeal but I omitted to mention that risk. So, relying rather more heavily on the maxim “better late than never” than I am comfortable with, I deal now with the fact that one of Green J’s findings has been reversed on appeal ([2015] EWCA Civ 651; [2015] PLSCS 197).
The dispute
The defendants – Richard Cowling and Neil Lawrence – were partners in MCL Property Consultants, a firm of agents. In October 2004, MCL was instructed by Northamptonshire Auctions plc (“NAP”) to handle the sale of Northampton’s cattle market. Just over a year later, the site was sold to Earlplace Ltd for £2.25m.
During this period, Cowling and Lawrence had agreed to dissolve their partnership and sell the business. Following that sale, only Cowling was to work for the new firm. At the same time as MCL was advising NAP on the sale to Earlplace, Lawrence was also advising Earlplace on an immediate onward sale to Kilmartin Ltd for £5m, more than double the price MCL had negotiated on behalf of NAP. Lawrence kept his dual role secret from Cowling and NAP. Earlplace also agreed to pay Lawrence a third share of any profit made from the onward sale to Kilmartin. This turned out to be just under £750,000.
Following the sale of the site, NAP was placed in liquidation and the liquidators assigned NAP’s rights of action to the claimant. The claimant then sued both Cowling and Lawrence on the basis that the property had been sold to Earlplace at an undervalue.
There were a number of different claims and counterclaims but Green J agreed with only one of them: that Lawrence had breached the fiduciary duties he owed NAP. This finding entitled the claimant to seek to reclaim Lawrence’s share of the profit from the sale to Kilmartin as well as Lawrence’s fee and interest.
The appeal
Although it is not expressly clear from the judgment, the assumptions are that the decision at first instance was of little practical benefit to the claimants, whereas a finding against Cowling could be – with one likely explanation that Cowling had professional cover but Lawrence did not.
Although the Court of Appeal, for whom Tomlinson LJ gave the unanimous judgment, had a number of issues to consider, two were key. First, could the claimants persuade the court that MCL’s valuation advice had been negligent given the increased price that Kilmartin was prepared to pay? Alternatively, was Cowling jointly and severally liable for Lawrence’s breaches of fiduciary duty?
Negligence
Perhaps surprisingly, the Court of Appeal had no difficulty in agreeing with Green J that MCL had not been negligent. The facts showed that NAP sold at the best price that it, a company in considerable financial difficulties, could obtain on the open market at the time and given the particular instructions given to MCL as to what sale terms and conditions would be acceptable. It was not MCL’s fault that Kilmartin made its offer to Earlplace and not to NAP.
Joint and several liability
However, it was clearly Lawrence’s fault that this happened. Was it also Cowling’s?
Fiduciary duties are among the most onerous imposed by the common law. Lawrence’s passing on of confidential information, and making a profit at Earlplace’s expense, were clear breaches of those duties.
Under section 10 of the Partnership Act 1890, each member of a partnership is liable for the wrongful acts and omissions done by their fellow partners in the ordinary course of the partnership’s business. In what was good news for any agent whose business is a partnership, Green J (relying on Dubai Aluminium Co Ltd v Salaam and others [2002] UKHL 48) had decided that Cowling did not share liability for Lawrence’s breaches of fiduciary duty under section 10: Cowling had not known what Lawrence was up to and Lawrence’s conduct was sufficiently divorced from the ordinary course of MCL’s business that Cowling escaped censure.
But the Court of Appeal disagreed and overturned Green J’s finding. The court felt that Green J had misapplied the decision in Dubai Aluminium.
Tomlinson LJ explained: “I can understand why, in human terms, the judge wished to exonerate Mr Cowling of joint liability for the ‘sharp practice’ of his partner. With respect, however, his conclusion is subversive of the legal policy underlying vicarious liability.” The key point was: “Mr Lawrence was not moonlighting, he was carrying out MCL’s business.” As such, Cowling shared Lawrence’s liability for his breaches of fiduciary duty.
Consequences
The case is a stark warning to anyone – especially any agent – trading in a partnership. You need to trust your fellow partners implicitly and have systems in place to try to protect against another’s wrongdoing for which you could end up sharing legal responsibility.
You might also consider whether the time has come to change your business structure to a limited liability partnership or limited company. Although there are pros and cons for doing so, you would at least be able to escape censure under the Partnership Act.
Stuart Pemble is a partner at Mills & Reeve LLP
